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Thinking of graduate school? Chances are you'll need loans to pay for it. Student loans make up 75% of the financial aid that's available to graduate and professional students. Seven out of ten master's degree recipients borrow, amassing debt that averages more than $32,000 (including undergraduate loans), according to the National Center for Education Statistics.
Among students in law, medical or dental school, more than 80% finance their education by borrowing. Their total debt typically ranges from $54,000 to $144,000.
You'll recognize the application procedure, which you start by filling out the federal FAFSA-the same form you (or your parents) filled out when you were an undergraduate (apply at www.fafsa.ed.gov for a streamlined procedure designed to prevent mistakes). This time you'll be considered an independent student, so your parents' income won't count. Each school may request additional financial information.
Borrowing limits are higher than for undergraduates. Grad students can borrow up to $18,500 a year in federal Stafford loans. You qualify based on need, defined as how much of the cost remains after subtracting what you can afford to pay and what you're offered in fellowships, scholarships and assistantships. If you qualify, up to $8,500 of that amount may be subsidized, which means that the federal government pays the interest while you're in school and for six months after you graduate.
The next $10,000 is unsubsidized, meaning interest starts to accrue immediately, although you don't have to begin repaying it until you graduate. If possible, try to pay the interest while you're in school to avoid having it added to the loan balance. Or ask your lender if all the interest can be added in a lump sum just before repayment begins. The interest rate on Stafford loans adjusts each July; the current rate for students who are in school is 4.7%.
Students in medical or dental school can borrow an additional $20,000 per year in unsubsidized Stafford loans. Including your undergraduate loans, you're permitted to borrow a maximum of $138,500 in Stafford loans, of which $65,500 may be subsidized.
The neediest borrowers may also qualify for a Perkins loan, on which the 5% fixed interest rate is subsidized by the federal government while you're in school and for nine months thereafter. Graduate students may borrow up to $6,000 per year in addition to Stafford loans. Funding is limited and availability varies by institution.
If you still need money, shop around for a private education loan, which typically carries a higher interest rate than a Stafford loan and often requires a co-signer. The financial aid office at your school may be able to steer you to the best deals, says Joe Russo, director of financial strategies for the University of Notre Dame.
Also, a number of tax breaks can help ease the burden of paying for grad school:
Lifetime learning credit. You're entitled to the lifetime learning credit, which is 20% of the first $10,000 you pay for qualified tuition and fees, up to a maximum of $2,000 per year. You can claim the credit even if you're in school part time, but there are income restrictions. For 2005, the right to claim the credit is phased out as your income rises between $43,000 and $53,000 on a single return, or $87,000 to $107,000 on a joint return.
Qualified tuition deduction. Earn too much to qualify for the lifetime learning credit? You still may be entitled to deduct a portion of your tuition via the qualified tuition deduction. Income limits for this tax break, which disappears in 2006, are higher than for the lifetime learning credit. You qualify for the maximum $4,000 deduction with income up to $65,000 on a single return or $130,000 on a joint return.
Student loan interest. You also can deduct up to $2,500 per year in student-loan interest -- a perk that's available even if you don't itemize deductions. You're entitled to the full deduction as long as your income is under $50,000 if you're single or under $105,000 if you're married and filing jointly.
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