Student, Parent, Private or Federal Loans: Explore All the Options

Student, Parent, Private or Federal Loans: Explore All the Options

Private student loans were once thought to be not as desirable as their federal loan counterparts. In fact, they were often deemed to be “inferior” to them.

That school of thought has changed quite a bit, as private student and parent loans offer options that can sometimes rank them ahead of federal loans.

For example, many private loans offer a choice between fixed and variable interest rates and offer varying degrees of breaks from payments.

Another positive feature of some private loans is not charging an origination fee, that is, an up-front fee of several percentage points just to facilitate the loan.

Families choose to use private loans instead of federal loans for many different reasons. Jackie Plante Collari, a Massachusetts parent and former engineer, is taking out private student loans for her daughter’s education and paying them back quickly.

Jackie and her husband decided to pay for some of her student’s schooling from their own income, but they can’t afford the large chunks of money that were due at the beginning of the semester.

Borrowing with a private loan, because federal loans charge origination fees, allows Jackie to only pay interest on the months she borrows.

When she’s just using the loan to spread out payments over the course of her student’s college experience, it’s a fairly reasonable option compared to payment plans from the school which don’t allow a long enough repayment time period.

Parent PLUS Loans vs Private Loans

When it comes time to borrow money to pay for college, many parents are confronted with decisions to make… do you get a Parent PLUS loan in your own name, co-sign for a private loan in your child’s name, or consider a private loan in just your own name?

The best decision of whether to use federal vs. private loans and which type of private loan will vary family to family and can depend on a number of different circumstances. When making decisions about the type of loan to borrow, its good to understand all the options, along with their pros and cons.

Here are some pros and cons of Parent PLUS loans, private student loans and private parent loans…

Pro: Minimal credit checks

For some, Parent PLUS loans have an important purpose. They enable a parent with less than stellar credit to borrow money for their child’s education, while some lenders may not do so. 

This is exactly why Amy F. chose to use a Parent PLUS for her student.

“Parents can cosign for their child to get a private loan IF they have good credit. I don’t right now. I am diligently working on building my credit and it’s getting better slowly but surely. If I could have cosigned then I would have gone the private loan route.”

Parent PLUS Loans have a much lower bar for approval and parents can borrow up to the full cost of attendance minus other financial aid awarded.

Con: Minimal credit checks

The high dollar amount awarded with minimal requirements for approval make Parent PLUS Loans an option that potentially could be financially crippling for parents.

A parent could get approved for $100,000 in loans based on the cost of attendance, regardless of their income level.

A private student or parent loan would look at factors such as income and the total amount of debt the parent has before deciding on approval amounts.

As one member of our Paying For College 101 group said,

“What I don’t understand is that the Parent Plus loans have that 4% fee and the private loans do not. Yet it seems like I am hearing you should apply for the parent plus loan vs the private loans. I am either missing something or just not getting it.

As a parent you are on either of the loans so there is no difference. My credit is fine so that is not my issue. I just don’t want to pay more than I have to for the loans we have to take out over the next few years. 4% hit for origination is huge! That alone has me feeling very uninterested in the Parent PLUS loan unless I can find a reason why it makes more sense than a private loan.”

You can potentially get lower interest rates from private lenders, such as College Ave Student Loans, because they factor in credit. As with so many other big purchases and decisions in life, it’s important to research interest rates from private lenders and compare them to the Parent PLUS loan interest rate and origination fee.

Depending on your credit, you may find lower rates with private lenders, so it’s worth the time to research.

Pro: Longer time periods for repayment

Parent PLUS loans have flexible repayment plans and in some cases you can extend repayment for up to 25 years.

Longer repayment plans are available for Parent PLUS loans under the Extended Repayment Plan or the Income-Contingent Repayment. Depending on your situation, these types of flexible repayment plans can help with some financial relief and be a perk to cut down on monthly payment amounts.

A private student loan will seldom offer time periods of over 15 years for repayment.

Con: The monthly payment affects your budget and credit for a long time

As a parent, having a 25-year repayment plan means you could potentially have student loan payments into your eighties.

If you have a loan for 25 years, your ability to get home or car loans could be affected for that entire amount of time.

When attempting to take out larger loans such as these, consider your debt-to-income ratio, the total debt payments compared to your income.

Pro: Automatic and near automatic time periods for payment breaks

Parent PLUS Loans do have options for payment breaks called forbearance or deferment just as federal student loans do.

Most private lenders also offer deferment or forbearance as well, but they won’t give you as many years of payment breaks.

Con: These options can delay interest while it builds for years

Parent PLUS Loans, unlike federal subsidized ones issued to students, continue to build interest while the student is in college and at all other times.

Thus, breaks from payment deferments can lead to interest piling on, which will lead to more debt.

Regardless of how much and from whom you borrow, try to keep your parent loan borrowing to what you could repay in a maximum of 10 to 15 years based on your current salary.

Pro: No confusion on who owns the loan

Private student loans are taken out in the student’s name, however, as the cosigner, the parent is still responsible. Many lenders offer a co-signer release option. If this is important to you as a cosigner, understand the requirements before agreeing to cosign.

As an example, private lenders, like College Ave. Student Loans, require that students will release cosigners based on positive payment history, income verification, and/or sometimes a credit review or other requirements (such as the amount of the repayment period that has elapsed). The requirements for releasing a cosigner usually varies by lender, so check with each one individually.

A slightly new alternative to a private student loan is a private parent loan. This is similar to a federal Parent PLUS loan in that the loan is in the parent’s name, but with private parent loans the lender is a private bank not the federal government.

Similar to private student loans, the benefit to a private parent loan is that lenders may be able to offer more competitive interest rates as compared to the Parent PLUS loan. If a private lender offers an interest rate lower than the Parent PLUS loan then you’ll save money by paying less interest over the life of the loan.

If as a parent you are committed to paying and borrowing for your student, it’s worth researching and comparing private parent loans as another borrowing option.

Not all lenders offer private parent loans, but one lender that does is College Ave. Student Loans. Check out their loan possibilities for parents.

In addition to not charging any origination fees and offering flexible repayments, with a private parent loan from College Ave. Student Loans you have the option to have $2,500 of the loan1 delivered to you so you can control spending on extra educational expenses like books, electronics, or dorm supplies.

Con: No cosigner release

Parent PLUS loans will always be in the name of the parent, as is the case for private parent loans. If the loan is solely to the parent, the parent owns the debt until it’s paid off.

But that’s not the case for private student loans.

After 12 to 36 months of on-time payments and good credit, parents can usually get released from private student loans borrowed by the student. (Requirements may vary by lender.)

Do Your Homework

By now it should be quite clear that there are both positives and negatives to choosing private loans vs. Parent PLUS loans.

There is no absolute RIGHT answer; it all depends upon your personal and financial situation. 

And that is what should be driving your decision.

Do your homework: Understand the different loan features and compare rates.

Ultimately, if you’ve done the proper research you should be comfortable with whatever choice you make.

1In order to receive up to $2,500 direct, a valid bank account must be designated for direct deposit of funds, and $1,000 or more must be certified by, and scheduled for direct disbursement to, the school.

This article is sponsored by College Ave Student Loans. To checkout their rates and see how they compare to parent PLUS loans click here.

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