What student loan should my daughter with no debt pay for her one-year master’s degree?

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Dear credible money coach,

My daughter is one year away from completing her master’s degree, but she needs a student loan of $ 30,000 to pay for her one-year master’s program. She does not have a student loan yet. She has a summer income which she saves to use during the school year and works four hours a week during school due to school requirements. What is the best type of loan for her? – Connie, California

Hi Connie,

Congratulations to your daughter for getting her masters degree without any student loan debt!

For many students, loans are inevitable, so it’s a good idea for your daughter to research the best student loan for her needs. Before taking out a loan, make sure your daughter checks with her school’s financial aid office to see if there are any grants or scholarships she may be eligible for.

It should start with federal student loans, as they are generally easier to obtain and have lower interest rates than private student loans. Typically, federal student loans do not have minimum credit, income, or co-signer requirements.

Three types of federal student loans are available: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.

How Federal Student Loans Could Work For Your Daughter

Since she must borrow for her master’s degree, your daughter will not be eligible for a federal direct subsidized loan. They are only available for undergraduates with financial need. But she could pursue an unsubsidized direct loan and a PLUS direct loan.

The maximum she could borrow on an unsubsidized direct loan is $ 20,500, which would not be enough to cover the full cost of her master’s program. She could then apply for a Direct PLUS loan to cover the remaining $ 9,500. She’ll end up with two loans to follow, but she’ll likely also get the best deal available on a student loan.

And, once she leaves school, she will have the option of consolidating the two loans into one direct consolidation loan.

Your daughter will need to complete the Free Federal Student Aid Application (FAFSA), and her school will use the information on it to determine her student loan amount.

What you need to know about private student loans

Another option for your daughter is to take out a private student loan to cover some or all of the $ 30,000. This approach has advantages, but above all disadvantages. If she, or her co-signer, has good credit and good income, she may be eligible for a better interest rate. She may also be able to avoid origination fees, which apply to federal loans. And having just one payout to track can be appealing.

Private student loans can also come in handy when a student has reached the maximum they are allowed to borrow on federal student loans. Private loans can fill a financing gap.

But private student loans don’t come with the same protections and repayment flexibility as federal student loans – which is why we always recommend looking at federal loan options first.

Need credible advice on a money-related issue? Email our Credible Money Coaches at moneyexpert@credible.com. A Money Coach could answer your question in a future column.


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About the Author

Dan Roccato

Dan Roccato is a clinical professor of finance in the School of Business at the University of San Diego, personal finance expert Credible Money Coach, published author, and entrepreneur. He has held leadership positions with Merrill Lynch and Morgan Stanley. He is a recognized expert in personal finance, global securities services and corporate stock options.

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