4 tips to pay back undergrad student loan debt in grad school
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Updated July 11, 2019: Optional choice or necessary step, going to graduate school can improve your career prospects and enrich your academic achievements. It’s also a great financial (as well as personal) sacrifice to pursue a master’s or doctoral degree. About 56% of students ultimately take out loans for grad school and finish with an average $37,000 in debt.
That amount might not seem all that insurmountable with the right financial habits in place … until you remember that you’ve still got undergrad student loan debt to pay off, too. Now, you might start to wonder if you should delay grad school for a decade or two, or if it’s even worth attending at all.
Don’t let it discourage you from taking to the halls of grad school or borrowing money for higher ed. There are plenty of ways to manage your new loans when you’re still paying down your undergrad debt.
Take these tips into account to follow through on school, pay off your student loans, and save money:
Requesting a deferment on your graduate student loans might seem familiar if you deferred some of your undergrad debt. But it’s an option you can pursue again once you’ve borrowed money for graduate studies. During deferment, you’ll owe no principal or interest on subsidized loans; on unsubsidized loans, interest will continue to capitalize, so borrowers will still owe that money, even when they’re enrolled in school more than half time. But don’t despair.
"We deferred our subsidized student loans while we were in graduate school and made any payment that we could while we were still in school," said Amber Masters, who, with husband Danny, are jointly paying off their student loans. "We still graduated with six figures of debt (I attended law school and husband Danny attended dental school), but making those payments certainly took the edge off."
Basing the amount of loan payments you owe each month on your take-home pay is another way to manage your graduate loan payments. Various income-driven repayment plans exist for this very reason, especially if you have federal direct graduate loans.
With income-driven loan repayment, your monthly loan payments are limited to a small percentage of your discretionary income, so full-time grad students working at the part-time level or hustling on the side can more easily afford their loans into their budgets. The U.S. Department of Education offers four plans:
Income-Based Repayment: caps loan payments at 10% of one’s discretionary income; eligibility based, IBR loans are forgiven after 20 years.
Income-Contingent Repayment: Not eligibility based, monthly payments are based on 20% of a borrower’s income; loans discharged after 25 years.
Pay-As-You-Earn: Demands payments up to 10% of discretionary income, with loan forgiveness after 20 years.
Revised Pay-As-You-Earn: 10% of discretionary income; loan forgiveness occurs after 20 years for undergrad loans, 25 years for graduate loans.
Under each plan, new borrowers after July 1, 2014 have their payments capped at 10 percent of their income, except for Income-Contingent Repayment, with a higher limit of 20 percent.
Most of these plans offer loan forgiveness after 20 to 25 years, but don’t take that as a reason to skimp on your payments, since interest will still accrue, and if you fail to make an effort in repaying your loans, it could reflect poorly on your credit score.
An alternative to loan refinancing is loan consolidation, a way of simplifying and managing several loans with different terms and interest rates by combining them into one single loan with one interest rate and one set of terms. Consolidating your loans -- whether federal or private -- can make them more affordable in the long run since the payment terms are usually extended over a longer period of time.
You’ve got several choices with loan consolidation: While you’re in graduate school, consolidate your undergraduate loans to manage those payments, and/or consolidate your graduate loans after earning your degree. Remember that if you consolidate your federal loans, they become private loans; and even though you may tap into a better, lower interest rate, you’ll lose some of those built-in benefits we mentioned above, like income-driven repayment privileges and loan forgiveness.
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When investment advisor Justin Follmer consolidated his loans, he compensated for the loss of these benefits with some clever loan hacks.
"I consolidated for 25 years at a fixed rate and set up automatic payments," said Follmer. "Much like a mortgage, there are ways to cut the term down simply by making one extra payment each year, or divide that one payment by 12 and add the resulting number to each monthly payment. I learned to use an amortization schedule to my advantage and can quickly see how small increases in payments will impact the total interest I pay over the life of the loan."
Follmer continued, "I view the monthly payments, not as a burden like most, but as my greatest investment in myself."
If you shopped around for the right undergrad loans, with the best terms and rates, and made sure not to borrow more than you needed, then you’re on the right track with graduate school loans. If not, now’s the time to start.
While most experts and advisors will recommend opting for the more flexible, affordable and privilege-driven federal loan, don’t discount private lenders -- you might be surprised at the APRs and borrowing options they may offer.
This is where good money habits and a healthy financial lifestyle come into play. Not overusing (or underutilizing) credit and paying off your monthly accounts on time (including your undergrad loans) makes a good impression on private lenders, where interest rates and loan approval, unlike federal loans, is credit driven.
"Banks love lenders that manage debt well," said Evan Harris, co-founder of SD Equity Partners. "If you have successfully been paying off your undergraduate loans, this will improve your credit score, and banks may even be willing to give you a lower interest rate, if you get your graduate loan through a bank."
Graduate school is meant to build on your undergraduate education, but the money you borrow to pay for it on top of your existing loans doesn’t have to compound out of control. Sometimes, the best way to manage your student loans is to minimize them as much as possible.
Don’t borrow more than you need. Many students caught up in covering tuition and other costs may end up borrowing more than they need. While this keeps your tuition covered, now you’ve got to pay back your loans, including unused money, with interest. Configure all your education costs before you borrow, and exhibit careful budgeting for all your expenses each semester to keep you on target, like housing, food, insurance and other loan/credit payments.
Seek out additional aid. Scholarships, grants and other special forms of financial aid can pay for graduate tuition costs in place of student loans. Your FAFSA is available from January to June each year; fill it out early and consult with your school’s financial aid office to explore your options and alternatives. Since you’re at the graduate level, more tuition funding opportunities may be available to you, like fellowships, residencies, research stipends and teaching assistance money to reimburse your costs.
Maximize your payments. Repayment is unavoidable with student loans, and when you’ve got both graduate and undergraduate loans to contend with, they’ll both need to be paid up at some point. By budgeting, cutting back on unnecessary discretionary purchases, saving where you can, and paying off as much as you can each month (especially towards your interest), you’ll get a head start on your loans to stay ahead of the game during and after grad school.
"The best thing graduate students can do," noted Masters, "is make payments — even small payments — while they are enrolled in their graduate studies to keep the interest on their loans from ballooning out of control.
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Image: Tim Gouw
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