With the first tuition bill payment due, many parents are trying to decide how to fund their child’s education. Should they use a Direct Federal Parent PLUS or Private Student Loan?
In this article, I will provide the options you must consider as you evaluate the two choices. Student loan interest rates are high for both types of loans. Private student loans are an attractive option since they do not have the high fees that the federal Parent PLUS loan carries. This feature makes the private student loan a more attractive borrowing option if interest rates are your primary focus. There are two significant advantages to a Private Student Loan rather than a Federal Student Parent PLUS loan:
- Lower Upfront Fees
- Market Interest Rates
Conversely, federal student loans are better if you want payment flexibility and possible loan forgiveness. As with anything, each option has advantages and disadvantages, so consider both before making the best borrowing decision.
Direct Stafford Should Be First
Before making your parent loan decision, the Direct Stafford Loan is the first loan option you should consider. The student and parents will need to complete the FAFSA to get access to this loan. This recommendation is because the Direct Stafford Loan is legally a student loan. The student will have better interest rates, fees, and repayment options than the parents. These loans should be taken from day one, especially if the student needs post-graduate studies.
Taking the Direct Stafford Loans from the beginning reduces the parent’s liability. The Direct Stafford has both an annual and lifetime limit. This strategy goes against most borrowing planning since you typically delay loans as long as possible. You need to understand the long-term liability risk that is often overlooked.
Funding the Shortfall with Private Student Loans
As more families need to finance a more significant part of college education, making the best loan decision is critical. The student’s and parent’s decision regarding the debt structure will determine their loan repayment, legal responsibility, and forgiveness options.
Most parents must understand that a Parent PLUS loan is legally the Parent’s responsibility, not the student’s. Unlike a Private Student Loan, it is the student’s legal responsibility and will most likely require a co-signer. The co-signer can be released, but the borrower will have some legal responsibility for a period of time.
If the parent or cosigner has a good credit score, in many cases, the interest rates on the private student loans will be lower than those on the federal loans. The private student loan interest rates are unique to each borrower, while the Federal Parent PLUS loans have the same rate for every borrower. The federal loan also has a high administrative fee that the private loan typically does not have.
Credit Report Impact
In both cases, each of these loans will appear on the student’s or co-signer’s credit report. It can impact each person’s future financing rates. It will depend on each person. This new debt will be included in their debt-to-income calculation. The debt-to-income ratio is important because it contributes to a person’s FICO score.
A person’s FICO typically will determine the interest rate a borrower can receive when financing any major purchase.
2024-2025 Interest Rate and Loan Fees
When comparing student loans, the cost of the money borrowed is what parents need to examine. The Parent PLUS Loan has a standard rate for all borrowers established each May and goes into effect each July 1. The 2024-25 Federal Parent PLUS rate is 9.08%. The loan fees are high at 4.228%.
The most significant difference is the fees associated with Federal Parent PLUS loans. These are usually over 4% compared to some private lenders with a 0-fee policy. This fee could be significant since if you borrow a net number, that family will need to increase the amount borrowed by the loan fee to reach the required amount due.
Under both programs, the borrower can defer payments until after graduation. During the deferment, interest will be charged to the loan.
Amount Limit
The amount a family can borrow under each loan is limited. Under both the Parent PLUS and Private Loans, the amount is determined by the student’s college cost of attendance minus the amount of their financial aid package.
For example, if the cost of attendance at a college is $55,000 and the student receives $20,000 of financial aid, the loan limit is $30,000. This would be the same for both Parent PLUS and Private Student Loans.
As stated above, to reach that net number, using the Parent PLUS loans, the borrower would need to increase that amount by $1,268 to cover the federal loan fees. That loan fee amount would be part of the loan, and interest will accrue during the deferment.
The colleges have an average Cost of Attendance (COA) for the student type: commuter, on-campus student, and off-campus student. Students and parents should review these numbers before committing to their loan amounts. For some, they may not need to borrow as much money to pay for the tuition expenses.
Death and Disability Benefit
The Parent PLUS loan has a death and disability benefit that is not always offered by private student loan lenders. This death and disability benefit is unique for Parent PLUS loans since it covers both the student and parent borrower. For example, if the loan were taken out for a specific child and that child should die or become disabled, the associated Federal Parent PLUS loan would be forgiven. This same forgiveness also applies to the actual parent borrower.
Parent PLUS or Private Student Loan Summary
As you can see, the simplicity often presented to families by many colleges could be easier and more transparent. The confusion and emotional stress contribute to the student debt crisis that many parents and students face. The PayForED In-College Payer is the only solution that helps families navigate the borrowing and repaying decisions in one place during this critical college journey. It allows both the student and parents to project the debt at graduation and how this debt structure will impact their loan repayment options. With all these options presented, families can make informed and better decisions. If you plan to use a private loan to help supplement the cost of college tuition, then PayForED can also help with our Private Loan Market Place.
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