Student loans are an essential part of many students’ b-school financing strategies, but they’re rarely user-friendly. You’ll face a multitude of options, and it’s up to you to decide the right loans for your situation. We’ll help you determine the right amount of student loans for your situation in our upcoming webinar, but for now, let’s take a look at the different loan options for MBAs and the general pros and cons of each.
At the highest level, you could borrow three types of loans to pay for your MBA: family loans, personal loans, and student loans. Not everyone has access to the first option of course, but if you do have a family member willing to provide the cash upfront, you could negotiate a great, low-cost funding source. Meanwhile, personal loans are usually far less preferable to student loans: Personal loans rarely offer interest rates lower than 9%, and most importantly, rarely offer in-school payment deferment options, meaning you’ll need to start repaying your loan as soon as you start school. Therefore, we’ll focus on student loans, the category of loans that are most broadly available and effective for MBAs.
There are two types of student loans: federal and private. U.S. citizens and permanent residents are eligible to apply for federal student loans and many private student loans, while international students cannot obtain financing from the U.S. government and should look to their schools’ financial aid office and private programs for financing sources.
The key federal loan programs are Direct Unsubsidized Loans (commonly known as the “Stafford for grad students”) and Direct PLUS Loans. Both offer fixed interest rates, which are set annually following the government’s auction of the 10-year Treasury note in May. At the time of writing, the interest rates are 6.21% and 7.21%, respectively, for these loan programs, and each comes with an added origination fee. This fee is common when borrowing both federal and private student loans, and is usually charged as a percentage of your total loan principal. For example, a 2% origination fee on an $80,000 loan means that a fee of $1,600 is added to your loan balance before your interest rate is applied. The origination fee is 1.073% for the Direct Unsubsidized Loan and 4.292% for the Direct PLUS Loan. Another federal loan program for which some borrowers may be eligible is the Perkins Loan program (which has no origination fee), but this is only available for those with exceptional financial need. If you’re eligible, you’ll be notified after you complete your FAFSA, or the Free Application for Federal Student Aid. Completing the FAFSA online is the first step to obtaining any federal aid.
Why would someone choose federal loans, or choose one loan program over another? Federal loans feature the government’s borrower protections, such as Income-Based Repayment to help those who struggle to meet their monthly payments under the standard loan plan. You can read all about these loan options and protections on the Department of Education’s website. When it comes to the specific federal loans mentioned above, you can only borrow up to $20,500 annually in the lower interest rate Direct Unsubsidized Loan – a limit that many MBAs will easily exceed given the costs of business school. Therefore, aside from the relatively few borrowers eligible for a Perkins Loan, it can make sense to borrow the first $20,500 of your loans via the Direct Unsubsidized Loan program before looking at other loan options.
The other option that many MBAs consider is private student loans from a financial institution like a bank or credit union, or a lending platform such as CommonBond. Private student loans come in more shapes and sizes than federal loans, including fixed and variable rate options. When taking out a loan through a private lender, as a rule of thumb, you’re likely to get lower interest rates on loans with shorter terms. (Lenders charge less interest for shorter terms because they assume less risk in lending for a shorter period.) Depending on the lender, you may find that private loans offer lower rates than the government options, so you might opt for private loans if you want to lower overall interest costs.
The tradeoff when choosing a private lender is that private loans do not come with the same borrower protections as federal options, e.g., you might get deferment and forbearance with a private lender, but you probably will not have an option to adjust your monthly payments based on your income (as you can using the government’s Income-Based-Repayment plan, for example). You should spend time researching private lenders to make sure that it offers basic borrower protections you need, such as in-school deferment. Our recommendation: Call up a lender’s customer service team and talk to someone there. This is a great way to explore your options and make sure you feel comfortable with the lender, especially if you need to ask questions in the future.
In the case of CommonBond, we offer an MBA Student Loan with two options at rates of 6.40% or 6.85% APR, respectively. As mentioned previously, CommonBond borrowers forego federal loan protections but have access to CommonBond-specific protections, like CommonBridge, a program where we help borrowers who are in-between jobs. If you have any questions at all about private loans, get in touch with our Care Team at firstname.lastname@example.org or give us a call at 800-975-7812, and we’ll be happy to help.
Kaitlin Butler is Content Manager at CommonBond, a student lending platform that provides a better student loan experience through lower rates, superior service, a simple application process and a strong commitment to community. CommonBond is also the first company to bring the 1-for-1 model to education and finance.
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