What student loan will my debt-free daughter have to pay for her one-year master’s degree?

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Dear Credible Money Coach,

My daughter is still a year away from completing her master’s degree but needs a $30K student loan to pay for her one-year master’s degree. She has no student loans yet. She has a summer income that she saves to use during the school year and works four hours a week during school due to school requirements. What is the best loan for her? — Connie, California

Hi Connie,

Kudos to your daughter who went all the way to her master’s degree without any student debt!

For many students, loans are unavoidable, so it’s smart of your daughter to look for the best student loan for her needs. Before applying for loans, make sure your daughter checks with her school’s financial aid office to see if there are any scholarships or grants she may qualify for.

She should start with federal student loans because they are typically easier to get and have lower interest rates than private student loans. In general, federal student loans have no 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 Can Work for Your Daughter

Because she must borrow for her master’s degree, your daughter is not eligible for a federal direct subsidized loan. They are only available to undergraduate students with financial need. But she could pursue a direct unsubsidized loan and a direct PLUS loan.

The maximum she could borrow with a direct unsubsidized loan is $20,500, which would not be enough to cover the entire 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 keep track of, but she’ll probably also get the best deal available on a student loan. And once she’s out of school, she has the option to merge the two loans into one loan Direct Consolidation Loan.

Your daughter must have the Free Application for Federal Student Aid (FAFSA), and her school will use the information to determine her student loan amounts.

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 especially disadvantages. If she, or her co-signer, has good credit and income, she may qualify for a better interest rate. She may also be able to avoid an origination fee, which applies to federal loans. And it can be attractive to keep track of just one payment.

Private student loans can also be helpful when a student has reached the maximum allowed to borrow on federal student loans. Private loans can fill a financing gap.

But private student loans don’t offer the same protection and repayment flexibility as federal student loans – so we always recommend looking at federal loan options first.

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About the author:

Dan Roccato is a clinical professor of finance at the University of San Diego School of Business, Credible Money Coach personal finance expert, a published author and entrepreneur. He held leadership positions at Merrill Lynch and Morgan Stanley. He is a well-known expert in personal finance, global securities services and corporate stock options. You can find him on LinkedIn.

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