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Big Change in Graduate School Loans Flew Under the Radar

posted by Nathalie Martin

When Congress recently compromised on balancing the budget, it chose to “save” Pell grants for undergraduates by throwing Stafford Loan for graduate students under the bus. It is unclear why this particular horse trade was necessary, and I am not even saying it was the wrong thing to do, but I do think people who might care (law students, law professors) should at least know about the change.

According to a recent article out of the Unviversity of Illinois, federal Stafford loans for graduate and professional students will no longer include an interest subsidy, which in the past kept interest from accumulating while students were in school. Students can still defer paying interest until after they graduate, but it will accumulate in the meantime. This will be true of all loans taken out in the Fall of 2012 until the law changes. This change is estimated to save the federal government $18 billion over the next 10 years. It could also cost individual students several thousand dollars, depending on how long their graduate studies last. Graduate students are currently allowed to borrow up to $8,500 annually through a subsidized Stafford loan, and another $12,000 in unsubsidized loans. After that they can get Graduate Plus loans — which carry a 7.9 percent interest rate vs. 6.8 percent for Stafford loans — up to the cost of their attendance. Medical students can borrow more in Stafford loans — up to $40,000.

Students can defer paying interest on the unsubsidized loans until six months after they graduate, but it continues to accumulate while they are in school. Repayment on Graduate Plus loans begins 60 days after the loan is taken out.

According to the National Association of Student Financial Aid Administrators, a graduate student who borrows $8,500 a year for four years, or $34,000, would accumulate $4,624 in interest during that time. Under the standard 10-year repayment plan, he would pay a total of $46,953 for that $34,000 loan if the interest were subsidized; if not, the loan would cost $53,338, or a difference of $6,385."

An idea of the impact can been seen in this one story coming of the University of  Illinois.  Aleem Zafar, a second-year UI medical student from Elgin, estimates he will pay at least another $5,000 because of the change. He's been frugal, avoiding loans as a UI undergraduate because his mom scrimped and saved, and carefully calculating the long-term costs of his medical education. He thinks he'll borrow at least $160,000, in all which he'll be repaying into his 40s."I think it will put a little bit more burden on me," Zafar said of the extra interest. "It starts accumulating really fast."



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