As a parent, you are presented with two primary options to assist in covering your child’s college expenses: Parent PLUS Loans and private student loans. Parent PLUS Loans, provided by the federal government, offer unique benefits, while private student loans, originating from private lenders, may feature lower interest rates for those with a favorable credit history. This article aims to delineate the key distinctions between these two loan types, aiding you in determining the most suitable option for your needs.
Credible provides a platform for comparing private student loan rates from multiple lenders, streamlining the decision-making process.
Parent PLUS Loans vs. Private Parent Loans
Both Parent PLUS Loans and private parent loans serve the purpose of allowing you to borrow funds for your child’s higher education. However, they diverge significantly in how interest rates are established and the repayment mechanisms involved.
Parent PLUS Loans
Parent PLUS Loans, formally known as Direct PLUS Loans, are offered by the U.S. Department of Education and are available to both graduate or professional students and parents of undergraduate students. The application process typically occurs online through the StudentAid.gov website. Eligibility may be restricted if you have an adverse credit history, such as a bankruptcy or foreclosure within the last five years or a track record of late or missed payments.
Parent PLUS Loans feature a fixed interest rate determined by the federal government, currently set at 7.54%. This fixed rate ensures that the interest remains unchanged throughout the loan’s duration. Borrowers can secure funds up to the full cost of attendance, as determined by the child’s school, minus any other financial aid received by the student. Additionally, a fee of 4.228% of the loan amount is incurred at the time of borrowing, with the government deducting this fee by withholding a portion from each loan disbursement.
Private Parent Loans
Private parent student loans exhibit no standardized requirements; instead, individual lenders establish their own criteria, interest rates, and repayment terms. Generally, lenders determine the interest rate based on the applicant’s credit score, with higher credit scores qualifying for lower rates and poorer credit resulting in higher rates if eligibility is met.
Private parent loans may offer both fixed and variable rates. Variable-rate loans typically commence with a lower APR, although this rate can fluctuate over time. Fixed-rate loans, on the other hand, remain unchanged throughout the loan’s duration.
Borrowers usually have the flexibility to choose between making full principal and interest payments while the child is in school or opting for interest-only payments to prevent interest accumulation. The repayment period for most private parent loans is typically 15 years, although certain lenders may offer shorter loan terms.
Optimal private parent loans feature zero loan fees. Similar to Parent PLUS Loans, the sole responsibility for repaying a private parent loan rests with the borrower.
Cosigned Student Loans
A third option for assisting your child in financing their college education is by cosigning their student loan. In this scenario, your child serves as the primary borrower, while you agree to be responsible for loan repayment in the event of your child’s default.
Cosigning a private student loan with your child is a viable consideration, especially when students may struggle to qualify for a loan independently due to limited or nonexistent credit history. By cosigning, lenders factor in your creditworthiness as well. It’s crucial to note that any missed payments will adversely impact both your credit and your child’s credit. Many lenders provide a cosigner release option, allowing you to disassociate from the loan once your child achieves a specified number of consecutive, on-time payments.
A cosigner is typically not required for federal student loans. If private student loans become necessary, consider visiting Credible to efficiently compare rates from various lenders in minutes.
Choosing Between Parent PLUS Loans and Private Parent Student Loans
Deciding between a Parent PLUS Loan and a private parent student loan requires careful consideration of your financial situation and specific preferences. The optimal choice depends on various factors, including your credit score, repayment preferences, and the desire for specific benefits. Here’s an analysis of when each option may be more suitable:
Parent PLUS Loan Considerations
Parent PLUS Loans might be the preferred choice when:
- Fair Credit: If your credit is fair and lacks significant issues, Parent PLUS Loans offer the same fixed interest rate regardless of credit score. In such cases, you might secure a lower rate compared to some private loans.
- Unique Repayment Plans: Parent PLUS Loans provide access to distinctive government-offered repayment plans, such as:
- Standard Repayment Plan: Equal monthly payments over 10 years.
- Extended Repayment Plan: Extended terms up to 25 years, yielding lower monthly payments.
- Graduated Repayment Plan: Initial low payments that gradually increase, suitable for those anticipating higher future income.
- Consolidation Options: If faced with high payments, consolidating multiple Parent PLUS Loans into a federal Direct Consolidation Loan allows enrollment in income-driven repayment plans, where monthly payments are capped at a percentage of discretionary income.
Private Parent Student Loan Considerations
Private parent student loans may be more appropriate when:
- Exhausted Federal Options: If your child has utilized all available scholarship, grant, and federal loan options, private parent student loans can fill the financial gap.
- Excellent Credit: Private lenders determine interest rates based on credit scores. With excellent credit, you may qualify for a lower interest rate compared to a Parent PLUS Loan, resulting in potential interest savings.
- Interest Rate Flexibility: Private loans offer the option of variable interest rates, providing a lower initial rate that may rise over time. If planning for a quick loan payoff, this option can be advantageous.
- Shorter Loan Terms: Private lenders often offer shorter loan terms (e.g., three, five, or seven years) compared to the standard 10-year term of Parent PLUS Loans. Opting for a shorter term can reduce interest costs and expedite debt repayment.
Ultimately, the decision hinges on your individual circumstances, creditworthiness, and preferences regarding interest rates, repayment plans, and loan terms. thoroughly assessing these factors will guide you toward the most suitable financing option for your child’s education.