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Why Does the Debt Deal Pick on Grad Students?

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Although we know that the so-called Budget Control Act will hit us with massive cuts, everyone's been left in a game of 20 Questions trying to figure out just where the slicing and dicing will occur. Except for one, oddly specific directive. If you -- or your children -- are about to head off to become a doctor, lawyer, or get any sort of graduate degree, Congress has already delivered the bad news: Starting next summer, you'll pay a lot more to go.

Under the new deal, the government will no longer subsidize the popular federal student loan, the Stafford, for graduate school. As a result, a typical borrower could pay an additional $7,000 in interest on federal student loan debt, estimates Mark Kantrowitz, who runs the invaluable student aid website FinAid.org.

Young people today have graduated into the worst economy since their grandparents (and in some cases, great grandparents) were their age. They have trouble finding jobs, and on top of that, they're dealing with enormous debt from undergraduate student loans. It's no wonder a record number of grads are moving back home with their parents, just to get by.

Not surprisingly, many have decided to play the grad-school card. More than one in four college graduates -- or about 27 percent -- opted for graduate school rather than face the dismal employment market, according to a survey of 2010 grads by the National Association of Colleges and Employers. The unemployment statistics support this logic, as more education correlates with high employment, according to the U.S. Department of Labor.

Despite this reality, Congress felt it the right time to hit students where it hurts the most: their wallets. Lest you think that these will be the only cuts to the academic world, think again. By November 23, lawmakers will have to trim $2 trillion from the budget, and other financial aid programs and grants are likely to land on the chopping block. Now, more than ever before, it's time to be vigilant about financing your education.

Here's how to save money on grad school:

  • Be sure you need to go. Could you gain the experience by working at a different company? Volunteering? Taking professional development courses? Ask yourself: Am I completely sold on this career path, or would it be smarter to test the waters with an internship? Obviously, if your aim is to become a dentist, you need grad school, but if you're dreaming of writing the Great American Novel, it might not be necessary.
  • Know what you'll pay when you graduate. You wouldn't buy a microwave without knowing exactly what it would cost you, so why would you do it for a graduate degree? Before choosing a school, figure out what your monthly student loan bills would be when you graduate, and how affordable that would be in your future job. The calculators at FinAid.org are terrific for helping you figure out how much school will cost, and the website Glassdoor.com can help you estimate what you'll earn. You have to make some educated guesses, but you can ballpark it.
  • Be realistic about your future job market. A report released this summer by McKinsey & Company says that too few people are getting the skills in school that will actually help them land jobs. They predict a greater demand for nutritionists, welders, and engineers. They also expect to see more openings in some healthcare positions and in jobs requiring computer specialties. The takeaway: Be realistic about your prospects, and acquire skills that are in demand.
  • Ask Uncle Sam. If you need help paying for grad school, federal loans are still cheaper than private loans, explains Kantrowitz. Start by filling out the Free Application for Federal Student Aid (FAFSA) at fafsa.ed.gov, the federal government's aid application. This will help you qualify for loans like Staffords, which are guaranteed by the government and currently fixed at 6.8 percent. You're allowed to borrow a total of $138,500 in Stafford loans (that includes undergrad debt). If you need more financial aid, consider applying for a Grad PLUS loan, which can help you cover the rest of your school costs at a fixed rate of 7.9 percent. Start with Staffords and then turn to Grad PLUS loans if you need to make up the difference.
  • Apply now for a subsidized loan. Unfortunately, the new debt deal eliminates subsidized loans for grad students starting July 2012, meaning that grad students will be on the hook for paying interest that accrues on their loans while they're enrolled. So anyone who can qualify for a subsidized Stafford loan in 2011-2012 should take the maximum amount, explains Kalman Chany, author of Paying for College Without Going Broke. Get a subsidized Stafford loan now, while they're still available, and reserve other resources for later use, if you can. Keep in mind, you have until the end of your school's academic year to file a 2011-2012 FAFSA.
  • Whatever you do, avoid private loans. Their interest rates are generally not capped, so they can turn very expensive, very quickly. And given that the debt deal is likely to affect interest rates, you can plan on private loans getting more expensive. Their interest rates can go into the double digits, sometimes as high as 20 percent. Worse, they don't have the same repayment rules as federal loans, which often allow you to postpone or defer payment if you get into financial trouble down the road.
  • Apply early and play the numbers game. You'll increase the chances of being offered a financial aid package if you cast a wide net. I know plenty of people who received no aid from several schools and then landed a very generous (and unexpected) package from just one. And apply early; many schools dole out scholarships and grants on a rolling basis, so if your application is evaluated later, some of the money could be gone.
  • Find free money. Even if the grants seem small compared to the price tag of your degree, they can add up. For example, if you're a woman studying in New York State, you're probably eligible for the $1,000 Grace LeGendre Fellowship, which is awarded to several female graduate students every year. If you're studying education, the James Madison Fellowship awards up to $24,000 to one person in every state. (Residents of the unincorporated territories and the District of Columbia are also eligible.) A great resource to help you find grants and scholarships is the website Fastweb.com.
  • Keep working while you're in school. According to the U.S. Department of Education, about 70 percent of MBA students, and about 80 percent of those studying education, enrolled in part-time programs while continuing to work. And many of them received financial assistance from their employers. If you are currently employed, talk to human resources to see what type of courses, if any, are covered. If you can handle the homework while holding down a job, that could be better than going to school full-time and then having to job search from scratch. Also, you might be able to claim the Lifetime Learning Credit to offset the cost of your tuition, advises Kalman Chany.
  • Take your tax breaks. The government offers students and graduates various tax breaks. For example, you may be able to deduct the interest payments on your loans, up to $2,500 a year. (Money that goes toward paying the principal, alas, is not tax deductible.) Check out irs.gov for more information.
  • Stay away from your IRA. If you have an IRA, the government allows you to make early withdrawals from it to pay for tuition, fees, and supplies. If you're thinking about doing this, or borrowing from your 401(k), don't. Avoid using these precious retirement funds for grad school.
  • Know your repayment options. If you're unemployed, still in school, or experiencing economic hardship, you can apply for deferment (that's when the lender allows you to postpone repayment and interest) or forbearance (when the lender allows you to postpone or reduce payments, but interest continues to accrue) on your federal loan payments for up to three years. See FinAid.org for more details. Under Income-Based Repayment (IBR), you pay no more than a set percentage of your income. The lower your salary, the less you pay each month. See IBRinfo.org for more information.
  • Pick careers that will get your debt forgiven. If you teach, work in the public service, or are employed in the healthcare field, there is a host of programs that will erase your debt. The National Health Service Corps offers licensed clinical social workers $60,000 in loan repayments in exchange for two years working in an underserved, high-need geographic area. Under the Public Service Loan Forgiveness program, people working full-time in public service careers (such as law enforcement, teaching, or the military) can get their remaining debt canceled after 10 years of employment. For more information, go to studentloanborrowerassistance.org; type "forgiveness" in the search bar.

And finally, let your congressperson know that you don't want to see federal funding for education cut one more penny. Call, email, tweet, write it in the sky if you have to: Preserve the money to help every American get a better education.

Beth Kobliner is a personal finance commentator and journalist, the author of the New York Times bestseller "Get a Financial Life: Personal Finance in Your Twenties and Thirties," and a member of the President's Advisory Council on Financial Capability. Visit her at bethkobliner.com, follow her on Twitter, and fan her on Facebook.

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