Once students have maximized all of their available financial aid, including grants, scholarships, work-study and Stafford loans, they may discover that they still need a loan to fill a funding “gap.” When this is the case, there are typically two options to consider: a Federal Direct PLUS Loan for parents from the Department of Education, or a private student loan funded by a bank or non-profit credit union.
So, which is better, a private loan or a Parent PLUS loan? Let’s take a look at each:
|Attribute||Federal Parent PLUS Loan||Private Student Loan|
|Interest Type||Fixed 7.00%||Fixed or Variable: Average rates between 5.50% and 12.87%|
|Origination Fees||4.276%||Range from 0%-8%, with 0% being more common|
|Average Loan Size||$13,655||Varies|
|Average Monthly Payment||$164.48||Varies|
|Term||10 Years||Anywhere from 8 to 25 years, depending on lender offers|
|Credit Eligibility||Lax – Credit history is looked at up to 2 years back, and derogatory amounts should not exceed $2,085||Strict – Credit based scoring looks at FICO pattern of behavior over time|
|Borrower||Parent||Student (with co-signer)|
|Deferment Options||Repayment is immediate, but borrowers may request a deferment. If deferment is granted, interest will continue to accrue||Most lenders offer options for full deferment and interest-only while in school. Borrowers should compare these options to find what suits them best|
|Grace Period||None – Parents must apply for hardship deferment||Options vary per lender|
|Application Process||Student must complete the FAFSA, and then parent applies online for the PLUS loan at the Department Website||Directly through the lender. Borrowers can also use comparison sites, such as Credible to compare their options.|
Direct Parent PLUS Loan
- If a borrower is denied, he/she may qualify for an increase in other federal loan assistance.
- The interest rate is fixed at 7%; this is higher than other federal aid, but lower than the average private loan, which is between 6% and 12%.
- With the new 2015 laws in place, Parent PLUS loans are generally easier to attain than are private loans.
- There are more options for pausing your payments due to financial hardship when compared to private loans.
- The loan origination fee is 4.276%, which can be considered high next to some private loans, which usually have no fees.
- If you are the parent of the student, you should know that you are responsible for paying back this loan, not your student.
- Unlike other federal loans, there is no income-based repayment plan (IBR) for the Parent PLUS loan. If you choose to consolidate your federal loans, keep in mind that you will lose your IBR option if you lump your Parent PLUS loan in with the others.
- PLUS Loans offer no deferment or grace periods, so the borrower is expected to begin repayment 60 days after disbursement.
Private Student Loans
- The student is held responsible for repayment, along with a cosigner who should step in only when the student can’t pay.
- Interest rates can be fixed or variable, with variable options sometimes running cheaper than the federal fixed options, depending on the credit score of the borrower/cosigner.
- Borrowers can compare the loans of several different lenders to find rates and benefits that will suit them.
- Most lenders offer full deferment and interest only options for students while they are in school.
- The criteria to qualify for a private loan can be strict, with interest rates and fees based on the borrower’s credit.
- Interest rates are, on average, higher than those for other types of loans.
Ultimately, it is up to the borrower to decide which option is best, while keeping in mind that scholarships and grants should be the very first options before borrowing. Be sure to study the pros and cons of the different loan options before making your educated decision on how to pay for college.