With the first payment of the tuition bill coming due, many parents are trying to decide on the best way to fund their child’s education. Families are faced with the decision of whether to use a Direct Federal Parent PLUS loan or a Private Student Loan? Before making this decision, the co-signer and borrower should understand the terms of the loan and the long-term financial impact of this borrowing decision.
As more families need to finance a larger 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 and forgiveness options.
Loan Legal Responsibility
Families should first determine the legal responsibility of the student loan being considered. The legal responsibility is different depending on the loan type. Before the parent decides to use a Direct PLUS or a Private Student loan, the student should take the Direct Federal Student loan. The Direct Federal Loan is the legal responsibility of the student and only the student. Direct Stafford also offers the best repayment and forgiveness options for the student.
The Direct Parent Plus Loans is the legal responsibility of the parent who signed for the loan. Parent PLUS loans offer only a limited number of repayment options. Many parents may take this type of loan with the expectation of the college-bound student repaying the amount. It is important for parents to know that if the child is unable to do so it will fall on the parent who cosigned for the loan to repay it.
Private Student loans have a different structure. These loans are legally the student’s responsibility yet most private student loans require a co-signer. The co-signer can be released under certain situations once the borrower can show their ability to make payments on their own. The minimal time to request a release is 36 to 48 months. The borrower must have an excellent repayment history, good FICO score, and a favorable debt to income ratio.
Credit Report Impact
In both cases, each of these loans will appear on the parent’s or co-signer credit report and can impact a 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 is a contributing factor in a person’s FICO score.
A person’s FICO normally will determine the interest rate a person can receive when financing a major purchase.
Interest Rate and Loan Fees
When comparing student loans, the cost of the money borrowed is what parents need to examine and is where you will find the biggest difference. Parent PLUS Loan has a standard rate for all borrowers that are established each May and goes into effect each July 1. The 2019-20 rates are 7.06%. The loan fees are high at 4%.
Private Student Loans can be cost-effective especially for those with good credit scores. These rates are unique to each borrow based on a person’s credit score. The fees are normally lower than the Parent PLUS loans.
Under both programs, the borrower can defer payments until after graduation. During the deferment, interest will be charged to the loan.
There is a limit a family can borrow under each loan. Under both the Parent PLUS and Private Loan the amount is determined by the student’s cost of attendance minus the amount of their financial aid package.
As an 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 the Parent PLUS and Private Student Loans.
Death and Disability Benefit
The Parent PLUS loan has a death and disability benefit that is not offered by most private loans. This death and disability benefit are unique for Parent Plus loans since it covers both the student and parent borrower. As an example, if the loan was 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.
As you can see, the simplicity that is often presented to families by many colleges is not that transparent or easy and helps contribute to the student debt crisis facing many parents and student loan borrowers today. The PayForED In-College Payer is the only solution that helps families navigate both the borrowing and repaying decisions in one place. It helps both the student and parent projects the debt at graduation and how the debt structure will impact their loan repayment option. With all of these options presented, families are able to make informed and better decisions. If you plan to use a private loan to help supplement the cost of paying for college then PayForED can also help in that area. Click here to obtain a list of loan partners who match our core beliefs of transparency and quality of service.