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To fill a funding gap in her son’s college account, Lisa Bright was faced with a decision: get a federal Parent PLUS loan or apply for a loan from a private financial institution.
With the help of a college financial advisor, he weighed the pros and cons. The Parent PLUS loan offers easy approval and quick turnaround time, he says, and has the potential to be eligible for some federal repayment and forgiveness programs.
On the other hand, some private student loans offer lower interest rates, compared to the 7 percent rate for PLUS loans, which also have an origination fee.
Ultimately, the lower interest rate offered by a private lending institution, where she and her husband found a rate slightly higher than 5 percent, convinced her.
“The Parent PLUS: I think the interest rate is a little high,” says Bright, who lives in Drexel Hill, Pennsylvania. “Private loans take a little longer, probably two to three weeks, but it’s worth it.”
[Consider this before borrowing a PLUS loan for your child.]
Most experts recommend that students first take full advantage of direct federal loans, both subsidized and unsubsidized, because of the significant options for deferment, income-based repayment, and loan forgiveness.
But if families still need to borrow more, they may have to choose between getting a parent PLUS loan or a private loan.
Be sure to consider these key differences in property, terms, interest rates, and approval requirements.
Responsibility: Offered by the Department of Education, the Parent PLUS Loan is borne by the parent of a dependent college student. That responsibility cannot be transferred to a student.
Persis Yu, director of the Student Loan Borrower Assistance Project at the National Center for Consumer Law, cautions that there is some confusion about this, and has seen borrowers who thought they were jointly signing a loan for their child or who thought that the child could do it. take over when you graduate.
“Certainly, a child could make the loan payments, but the loan is the sole responsibility of the parents,” Yu says.
A student can apply for a private loan, but if a parent needs to co-sign, he or she is still responsible for the payment.
“The joint signing defeats the purpose,” says Mike Sullivan, a consultant for Take Charge America, a nonprofit credit counseling agency. “If you are a co-signer on a loan, it is your loan.”
[Find out how to transfer parent PLUS loans to a child.]
Interest Rates and Fees: The interest rate for PLUS loans is set at 7 percent. Private student loan rates may be lower, but depend on the applicant’s creditworthiness and demonstrated ability to pay. Some fixed rate private student loans start at less than 5 percent.
PLUS loans also require a loan fee of 4.276 percent for loans taken after October 1, 2016. That means a parent pays a fee of $ 427.60 for a loan of $ 10,000.
“It’s not a good fee to begin with, and then they add the fee, which makes it even more expensive,” says Sullivan.
But borrowers should be careful because many private loans offer variable rates, Yu says, which may seem attractive at first but have the potential to increase dramatically.
“We are talking about products that have very long payback periods,” says Yu. “Usually we are looking at 10 years, possibly 25 or 30. If you have a variable interest rate, there is a lot of time for it to increase.”
[Take these steps to understand student loan interest rates.]
Conditions: Parent PLUS loans have only some of the advantages of other federal loans. Borrowers can request deferment or forbearance, which is a period in which monthly loan payments are temporarily suspended or reduced. Certain cancellation rights also apply, such as leave due to disability or death.
“It’s not very comforting to say, ‘Oh, if you or your child dies, you won’t be affected by the loans,” Yu says. “Nobody thinks about that, I’m sure, when they apply for a loan, but it has actually caused a lot of problems.”
Parent PLUS loan borrowers are eligible for graduated and extended repayment plans, but not some of the income-based repayment plans available for other federal loans, such as the Revised Income Repayment Plan, Repayment Plan based on income and payment plan based on your income. They may be eligible for income-dependent repayment if they consolidate, but “borrowers have to do some fancy footwork,” Yu says.
“Payment plans are generally more flexible than private loans, but not necessarily as flexible as other types of federal loans,” Yu says.
Private loans do not offer payments based on income. Other terms will vary by lender. They may offer deferral of payments while the student is in school, or a brief forbearance, but interest will likely continue to accrue.
Approval Requirements: Parent PLUS loans require a credit check, but there is no “ability to pay” standard like in the private market, Yu says.
PLUS loans also have generous limits, allowing parents to borrow up to the cost of attendance, less any other financial aid. That may seem like an advantage, but it can lead to problems in the future.
“This is a place where we see many vulnerable parents taking on this debt without fully appreciating what they are taking on,” Yu says.
Are you trying to finance your education? Get tips and more in the US news. Paying for Collegecenter.
