Grad PLUS Loan: Complete Step-by-Step Guide

Paying for graduate school can be quite a hard river to navigate. You’ve got numerous funding options, each with their own pros, cons, and interest rates – how can you choose? While we can’t select the option for you, what we CAN do is tell you about one of your options called a Grad PLUS loan.

This is an option that allows you to borrow funds to pay for your grad school attendance, housing costs, and more, and it has a lot of pluses, but also a few caveats.

Today we’re going to give you the you the scoop on this financing option so that you’ll have all of the information that you need to decide if the Grad PLUS is going to be a good fit for you. We’ll tell you what a Grad PLUS loan is and what it can do for you, how to know if you are eligible, how much you can borrow, and more!

Let’s take a closer look at the Grad PLUS loan and what it really means where your educational needs are concerned!

Here is what we will cover in this article:

What Is a Grad PLUS Loan?
Am I Eligible for a Grad PLUS Loan?
How Much Can I Borrow With a Grad PLUS Loan?
Understanding the Interest Rates and Fees Involved in a Grad PLUS Loan
Repaying Your Grad PLUS Loan
What Happens if I Don’t Pay Back My Loan?
Frequently Asked Questions

What Is a Grad PLUS Loan?

A Grad PLUS option is a type of Federal Direct PLUS loan that can provide you with complete funding, but most should not use it this way. That is because the loan is meant to ‘fill in the gaps’ once you’ve paid for the lion’s share of your education through subsidized or unsubsidized loans. The reason that you would go with one of these two options first is that they tend to have a lower interest rate.

That said, the US Department of Education provides Grad PLUS loans to students who are qualified, making them available through your school, and these loans are attractive because they not only pay for your attendance, but you may apply to borrow enough to cover things such as living expenses as well.

Finally, while they have a higher interest rate, Grad PLUS loans are federally funded, which means that you have a greater level of financial protection than you would with a loan from a private institution.

Whether you decide to use it as a ‘complete’ ticket, as a means to supplement loans that you’ve already qualified for, or to skip it altogether is going to be up to you but there is more that you need to know about this loan.

Stick with us and we’ll elaborate, starting with the ‘foundation’ point of the process – how to know if you are eligible in the first place!

Am I Eligible for a Grad PLUS Loan?

First things first, you’re going to have a form to fill out that is known as the ‘FAFSA’. This is short for ‘Free Application for Federal Student Aid’. You can view the form here or simply go to the U.S. government FAFSA website.

Filling out your FAFSA is not only going to help you in determining if you are eligible for a Direct PLUS loan, but it’s your gateway to more that $150 billion dollars’ worth of available student loans, work-study funds, and college grants – so if you haven’t done this yet, then you need to. It’s well-worth your while.

Here is what you are going to need to gather before you fill out your FAFSA:

You’re going to need your Federal Student Aid ID, so if you haven’t gotten that yet then you must go to gov first. If your parents will be helping, they’ll need an ID too, and be sure that everyone keeps their ID information private!
You’ll also need your driver’s license and social security number, unless you are not a U.S. citizen, in which case you will need your alien registration number.
Next, you’ll need proof of income, in the form of your W2 forms, federal income tax returns, and any other statements that indicate other uncovered income. If your parent’s are helping out, you’re also going to need their 1040 forms, income tax refunds, and their W2 forms as well.
If you have any investment records, these will come next, as well as current bank statements for yourself and your parents (if applicable). If any income was not taxed for you or your parents, then records of this will be required as well.
Finally, you’re going to need the Title IV Institution codes for every school that you want to apply for. Don’t worry – you can get them at the FAFSA federal school code search tool.

Once you’ve collected all of these items then you are ready to fill out the FAFSA. A credit check is going to be part of the process, but if your credit is poor there is still a chance that you will qualify for a number of options and in a worst-case scenario, you might be able to use an ‘endorser’, who will act as a co-signer for your loan. So even if you are a little worried, be sure to fill out the FAFSA – it’s the only way to know your options – and you might just be pleasantly surprised. More educated citizens are going to be more reliable taxpayers, after all, so it’s in the government’s best interests to help you if they can – so take advantage of this tool!

One final note – While you are completing your application, you’ll have an option with the Grad PLUS loan application for allowing your school to use part of the loan for other educational charges aside from attendance, so if you will need this for additional costs then be sure to select this option.

How Much Can I Borrow With a Grad PLUS Loan?

With a Graduate PLUS loan, you can borrow up to $20,500 per year, up to a cumulative total of $138,500. Now, you can use this to borrow up to the complete cost of your attendance, though this will be minus any other loans towards your education that you have already accepted.

This is important to note – after your FAFSA is done, you might well have some subsidized or unsubsidized loan options available to you that are at a lower interest rate and if you do, then you’ll want to consider them.

You will also want to keep in mind that with the Graduate PLUS loan, there is going to be an origination fee that will be subtracted from your total funds borrowed, so if this will impact your ability to pay the expenses that it is supposed to cover, then you’ll need to borrow a little more to cover the cost.

The origination fee is a set percentage of 4.228% and it’s important to note that this is higher than the origination fee that you’ll pay for federal direct unsubsidized or subsidized student loans, which is yet another reason that you want to carefully consider ‘spreading the costs’ of your education through these options.

Always go with the lowest interest rate when you can – yes, it takes more time, but you need to do it as eventually you’ll have to pay for these loans and rushing through the process will definitely cost you in the long run.

Now that you know how to apply and how much you may borrow, let’s look at the interest rates so that you’ll have a realistic look at the costs behind this financial aid option.

Understanding the Interest Rates and Fees Involved in a Grad PLUS Loan

The first thing that you need to know about the interest rates for a Grad PLUS loan is that they are the same for everybody – regardless of your credit rating. This is important to know because if you have been taking excellent care of your credit, then you can easily get a lower interest rate through private loan options that could literally save you THOUSANDS in interest payments by the termination of the loan’s life.

So, if you’ve got stellar credit, consider private loans first – that’s a lot of money that you could put into a ‘startup’ fund for your own business once your education is done and your loans are paid and behind you. Just a little food for thought!

The set rate for the Grad PLUS loans is going to be 7.54%, and to understand what this means properly, we need to compare it to other federal student loan options, as well as private loan options. With about 90% of current federal student loans options, the interest rates fall into an average range of 4.99% up to 7.54%, so the Grad PLUS loan is at the highest rate of federal options.

Private loan interest rates can be as little as 1.29% (if your credit shines like the sun), but more realistically tend to fall into an interest-rate range of 3.22% up to 13.99 percent.

This is the main reason why the Grad PLUS loan option is typically used to supplement lower-interest loans for covering the remaining ‘gaps’ in education costs – it’s a higher interest rate than your private, subsidized, and unsubsidized options in many cases, but it’s also more flexible about covering costs such as your housing and it’s federally protected.

This is good, but keep in mind that you only want to borrow what you absolutely can and intend to pay back — Grad PLUS loans stick to like glue and even filing for bankruptcy is no guarantee of dissolving it unless you can prove an ‘undue hardship’ at that time.

It’s not a decision to take lightly, so let’s talk next about your repayment options, as well as what happens if you aren’t able to pay, so that you can make a final determination on whether or not the Grad PLUS is going to be a good fit for you.

Repaying Your Grad PLUS Loan

Once your loan has been dispersed, it’s going to start accruing interest, even though you won’t be required to start paying back your loan back until within 60 days of the final disbursement during in your last academic year of Grad Plus loan assistance. In simple terms, this just means that your payments will start approximately 6 months from graduation.

If you intend to continue your education and spend at least ‘half time’ in a degree-focused program, then your Grad PLUS will automatically be deferred, but otherwise the loan term states that you have 10 years on the ‘standard repayment plan’ to pay back your Grad PLUS loan and the accrued interest.

One way to get ahead and save yourself a lot of money it to begin paying the interest right away — while you are still in school — otherwise the interest is becomes ‘capitalized’, which just means that it is added to your total for when you start making payments.

If you’re worried about your income during the time that you’ve just finished your education, then you’re not alone and the government has considered this as well. Options are available such as ‘Income-Based Payments’ or simply ‘IBR’ and ‘Pay as you Earn’, also known as ‘PAYE’.

IBR/Income-Based Payments

Income-Based Payments are the more flexible of these two options and to qualify, you’ll need to show that your current income is that your student loan is more than your annual discretionary income, or at least that it is a significant portion of it. You’ll also need to prove that your current income qualifies as a ‘financial need’ scenario that requires lower payments than the Standard Repayment plan.

If approved, your payments will generally be reduced to 10 – 15% of your discretionary income, which is calculated by determining the difference between your gross annual income and 150% of the federal poverty guidelines as determined for your state and factoring in the size of your family.

If approved, the repayment period is 20 years for new borrowers and 25 years for those who have borrowed before.

Paye/Pay as You Earn

Pay as you earn is actually quite similar to Income-Based Repayment, but with slightly more strict eligibility requirements. As with IBR, you will need to demonstrate that you have a financial need for the program, and you need to be a recent borrower – so older loans will not necessarily qualify for PAYE.

If you do qualify, payments will be 10% of your discretionary income, as calculate by the same standards as IBR (the difference between your annual income and 150% of the federal poverty guideline, adjusted based on the size of your family.

This option gives you the lowest payments and the repayment period with this plan is 20 years.

What Happens if I Don’t Pay Back My Loan?

If you are unable to pay back your loan, don’t simply give up on it. As we demonstrated with the IBR and PAYE options, you definitely have choices to get your loan payments to a much more manageable level, but if you simply ignore it then it will keep compounding interest and even bankruptcy may not necessarily remove it from your record.

It might – despite the myths you’ve heard, bankruptcy CAN cover student loans – but only if you can prove to a court that it would be an undue hardship and meet the following 3 requirements:

Poverty – Your current income means that you cannot meet the most basic standard of living for yourself and your dependents.
Persistence – This financial state is unlikely to change in the foreseeable future.
Good faith – You have been attempting to pay what you on your student loan on a regular basis.

As you can see, bankruptcy might not even help, so it’s best to take advantage of the programs that are out there to help you pay your student loan debt.

The maximum repayment period for the loan is 25 years, after which any remaining debts will be considered to be discharged/forgiven – but there is a caveat even to this. At the point that the debt is discharged, the amount of money that you owed is considered to be table income and you will be expected to pay all of the taxes for that remaining amount.

If you are dealing with multiple student loans, your Grad PLUS may also be consolidated with any other federal student loan and they can even be refinanced through a private student loan if you’re chasing an advanced degree curriculum that is going to span many years.

So, don’t panic if you are having trouble repaying your loan. You’ve got lots of options that can help you to get your payments lowered to a very manageable level so that your credit will remain intact, you can get your loan paid, and you can move on with your new life with your shiny new degree!

Some Final Words on Grad PLUS Loans

In today’s article we’ve talked about the Graduate PLUS loan and what it can really do for you. While it can be used to cover ALL of your qualifying expenses, due to the higher interest rate it’s really going to be best to use any lower-interest options at your disposal, rather than relying on the Grad PLUS alone.

You won’t have to repay it until 6 months after graduation, but since the interest builds up then we highly recommend that you pay the interest early if you can afford it. This will save you a lot of money through the years but if this isn’t possible, don’t forget that there are many payment programs out there which can definitely help.

Getting an education can be expensive, but once you get the chance to fill out your FAFSA then you’ll be able to see that it’s definitely not impossible. With a little help in the form of one or more of the many government loans available, you can get the education you want and chase the career that you’ve always dreamed of.

Just be sure to comparison-shop those interest rates to get the best deal!

Frequently Asked Questions

Before we go, we’ve compiled a few frequently asked questions to help make sure that you have all of the information that you need to get started on applying for your Grad PLUS loans. If you have a question that we haven’t covered, then please visit studentaid.gov to get more detailed information on parent and student PLUS loans.

How Much Should I Borrow So That I Know I Can Pay It Back?

If you are going to be borrowing every year that you will be in school, then the first thing that you need to do is estimate the amount that you will be borrowing and then take advantage of Studentaid.gov’s loan repayment calculator. You want to target a repayment schedule that you can keep that ideally does not exceed 8% of your gross monthly salary.

It is also highly recommended that if you get the occasional ‘windfall’ of extra cash, that you pay a little extra when you can. While small, extra payments may not seem like a lot, you’ll be surprised how quickly they can help to reduce your debt over time so that there less total debt accruing more interest.

Just don’t forget that with Grad Plus there is a 4.228% loan origination fee that you will need to pay, so if this amount will make your funds insufficient for the financial coverage that you need, then you should borrow a little more in order to compensate for this.

What Happens if I Am Denied a Grad PLUS Loan Based on Bad Credit

If this should occur, then you may attempt to obtain an endorser or you may choose to document the extenuating circumstances in regards to your adverse credit history. You will need to contact your student aid office to advise them of your endorser or extenuating circumstances documentation and your intent to further pursue the Grad PLUS loan. You will also be required to complete Direct PLUS Credit counseling as well in order to pursue reconsideration for the Grad PLUS loan.

How Do I Request Deferred Payments for My Grad PLUS Loan?

If you are still enrolled in school for a minimum of half-time, then it is possible to request a deferment for the time that you will remain taking classes. You will want to call 1-800-557-7394 to ask about Federal Student loan deferment.

How Do I Request Deferred Payments for My Grad PLUS Loan?

During peak application times, such as summer and fall, the process can take up to 4-6 weeks in order to be fully processed, by which time the loan should be posted on your financial aid summary. The actual funds, as with any federal student loans, will be sent first to the school, so that they may be used towards tuition, school fees, and other items such as your room and board.

Can I Check My Credit Report for Free Before Applying for My Grad PLUS Loan?

Yes, you may certainly check your credit report before you apply and it’s actually a good idea to do so every year. To obtain a free copy of your credit report you can go to annualcreditreport.com and this will allow you to get your report and to check for any erroneous entries that are present.

This will help you to know in advance if you might need a cosigner, such as a parent or even a grandparent, or you could also appeal to the United State Department of education if your credit rating is bad due to extenuating circumstances which you can prove.

You can find out more about the process for documenting your extenuating circumstance and that way, if your credit is denied then you will still have a viable path that you may pursue in order to potentially still get your PLUS loan or an alternative federal loan that you might then qualify for.