4 Mistakes to Avoid When Weighing Graduate PLUS Student Loans

Students heading to graduate school have many firsts awaiting them, from their first teaching assistantship to their first thesis adviser and first published academic paper.

They may also be borrowing their first Graduate PLUS loan, federally backed student debt, which covers up to the full cost of graduate school, including living expenses, minus any other financial aid.

But with access to great amounts of student debt comes great responsibility.

Graduate PLUS loans' relatively high borrowing limit can cause graduate school debt to skyrocket out of control for students who aren't careful.

In fact, about 40 percent of the approximately $1 trillion in outstanding student loan debt comes from graduate and professional degrees, according to a 2014 report from the New America Foundation.

And graduate students borrowed an average $57,600 in 2012 in combined graduate and undergraduate debt, according to the same report.

To avoid becoming mired in student loan debt, "it's a good idea for people to carefully explore their options," says David Horne, director of the financial aid office at Towson University.

Plus, they should avoid these four costly mistakes.

Learn how to [tackle undergraduate debt while in graduate school.]

1. Not tapping cheaper debt: Graduate PLUS loans -- with their current 7.21 percent interest rate and high origination fees, which are deducted from the principal upon disbursement -- are not the cheapest federal loan available for graduate students.

"The Grad PLUS interest rate is ridiculously high for a federal loan," says Brad Barnett, senior associate director of the office of financial aid and scholarships at James Madison University.

Before taking on PLUS debt, graduate students should ask their university about the availability of Perkins loans, say experts. Perkins loans are awarded based on need, up to $8,000 for graduate students, and carry a 5 percent interest rate, which is covered by the government in school.

"They're definitely the best loan to borrow," says Ben Kohl, president of the Kansas Association of Student Financial Aid Administrators, although he notes that their future is uncertain.

Direct unsubsidized federal loans are the second-cheapest option. Graduate students are eligible for up to $20,500 in those loans. They carry a 6.21 percent interest rate, and interest isn't covered while the student is in school.

Work -study, which provides part-time work for students with financial need, is also available to graduate students.

For some students, depending on the cost of their program and additional scholarships or savings, these sources of debt may be enough to cover the cost of attendance.

Others may need to tap Grad PLUS debt to make up the difference.

Keep in mind that federal subsidized loans, which are available to needy undergraduates and have interest covered in school, are not currently awarded to graduate students.

Discover [four ways graduate school loans differ from undergraduate debt.]

2. Dipping into private debt: At first blush, some private student loans, especially those with variable interest rates, can appear cheaper than federal PLUS loans.

But approach private debt cautiously, say experts. In exchange for a potential lower-rate loan -- depending on the students' or cosigners' credit -- borrowers pass on federal repayment benefits, such as Public Service Loan Forgiveness, income-driven repayment and forbearance. Plus, private loans frequently require a cosigner, such as a parent or grandparent, while a PLUS loan typically does not.

"We encourage people to look past the interest rate and toward the protections that the federal loans offer," says Barnett, of James Madison.

Experts encourage borrowers to be wary of the variable-rate private loan, which allows interest to fluctuate over time. The rate may be low today but could skyrocket down the road.
3. Borrowing too much: "A mistake that a lot of students make is automatically borrowing the full cost of attendance without knowing if they need the money or not," says Barnett. "Plan out what your expenses are going to be."

Read about how to [compare graduate schools by dollars and cents.]

If there's room in their budgets, students can elect to borrow less than the amount offered. Say, they determine that their rent is cheap or that they can save on personal expenses.

Borrowing less will keep that money of out their bank accounts, and temptation, say experts. If they discover later on in the semester that they didn't borrow enough, students can choose to borrow the remainder of the loan. Just don't wait until the last minute to request extra funds. Give the paperwork several weeks for processing, says Horne.

4. Not paying interest: The interest rate on PLUS loans for graduate students isn't just high, it accumulates while the student is enrolled in school.

After graduation, the interest that has accrued during graduate school will be added to the loan's principal, called capitalization. "When the loan goes into repayment, all that interest gets rolled into the principal. Now the principal is increased," says Deborah Agee, director of financial aid and scholarships at the University of California--Davis.

That can make the loan even more expensive, as the student pays interest on interest, say experts. Making interest-only payments while in school can help mitigate the cost.

Al Anzola, who borrowed around $35,000 in a combination of PLUS loans and other federal debt for one year at Hofstra University's law school, decided to use a similar technique when he took a year off.

He's been accepted at another law school next year and is paying $500 per month while his loans are deferred in the interim. "I thought, 'Holy crap! I owe them how much a month?'" he says of seeing his first bill. "Thankfully the process has been much cleaner than I thought it would be."

Trying to fund your education? Get tips and more in the U.S. News Paying for Graduate School center.

Susannah Snider is an education reporter at U.S. News, covering paying for college and graduate school. You can follow her on Twitter or email her at ssnider@usnews.com.