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?
We are still navigating the impact of COVID. Some schools have added new requirements and fees related to COVID that you need to understand. Make sure you understand which items you need to pay before sending the check or selecting your loan amount.
In addition, student loan interest rates are still relatively low. Private student loans are an attractive option since they do not have the high fees that the federal Parent PLUS loan carries. This may make the private student loan a more attractive borrowing option. There are two major advantages to a Private Student Loan rather than a Federal Student Parent PLUS loan:
- Lower Upfront Fees
- Market Interest Rates
As with anything, some positives and negatives need to be reviewed before making the best borrowing decision.
Direct Stafford Should Be First
Before making your loan decision, the Direct Stafford Loan should be considered first. The student and parents will need to complete the FAFSA to get access to this loan. The reason for this recommendation is 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 will be needing post-graduate studies.
Taking the Direct Stafford Loans from the beginning reduces the parent’s liability down the road. The Direct Stafford has both an annual and lifetime limit. This goes against most borrowing planning but you need to understand the long-term liability risk in the future that is often overlooked.
Funding the Shortfall with Private Student Loans
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, legal responsibility, and forgiveness options.
Most parents do not understand that a Parent PLUS loan is legally the Parent’s responsibility and 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 legally 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 the federal loans. These private student loan interest rates are individually created while the Federal Parent PLUS loans are the same rate for every person. The federal loan also has a high administrative fee that the private loan normally does not have.
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 contributes to a person’s FICO score.
A person’s FICO normally will determine the interest rate a borrower can receive when financing any major purchase.
2021 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 2021-22 Federal Parent PLUS rate is 6.284%. The loan fees are high at 4.228%.
The biggest difference is the fees associated with Federal Parent PLUS loans. These are normally over 4% compared to some private lenders with a 0-fee policy. This could be significant since if you need to borrow a net number, that family will need to increase the amount borrowed by 4% 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.
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 college 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.
As stated above, to reach that net number, using the Parent PLUS loans, the borrower would need to increase that amount by $1,284 to cover the higher fees. That amount would be part of the loan and be charged interest.
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 are unique for Parent Plus loans since it covers both the student and parent borrower. As an 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.
As you can see, the simplicity that is often presented to families by many colleges is not that transparent or easy. The confusion and emotional stress help contribute to the student debt crisis facing many parents and students. The PayForED In-College Payer is the only solution that helps families navigate both the borrowing and repaying decisions in one place during this critical college journey. It helps both the student and parents 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 paying for college then PayForED can also help with our Private Loan Market Place.
Our Preferred Private Student Loan Lenders
Variable Rates: 5.09%- 15.99% (APR)* Fixed Rates: 4.44% - 15.99% (APR)* Variable Rates*: 6.12% – 16.45% Fixed Rates*: 4.50% - 15.49% Variable with ACH: 5.94%- 15.83% Fixed with ACH: 4.48% - 15.51% Variable Rates: 4.98% - 12.79% (APR)* Fixed Rates: 4.48% - 12.29% (APR)*
Variable Rates: 5.09%- 15.99% (APR)*
Fixed Rates: 4.44% - 15.99% (APR)**Rates includes .25% Auto Pay Discount
Variable Rates*: 6.12% – 16.45%
Fixed Rates*: 4.50% - 15.49%*Lowest rates shown included auto debit discount
Variable with ACH: 5.94%- 15.83%
Fixed with ACH: 4.48% - 15.51%
Variable Rates: 4.98% - 12.79% (APR)*
Fixed Rates: 4.48% - 12.29% (APR)*