Paying for College Using Private Loans

 

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?   Making this even more confusing is the entire COVID situation and what will education look like in the fall. 

This year is also very different since we are at record low-interest rates.  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, there are positives and negatives that need to be reviewed before making the best 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 the student loans.  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.

Funding the Shortfall with A 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.

What most parents do not understand is a Parent PLUS loan is legally the Parent’s responsibility and not the students.  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 will have some legally responsible 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 normally be lower.  These private student loan interest rates are individually created while the Federal Parent PLUS loans are the same rate for every person.

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 any major purchase.

2020 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 2020-21 Federal Parent PLUS rate is 5.3%.  The loan fees are high at 4.28%.

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 the 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.

Amount Limit

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. 

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.

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.

Summary

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: 1.24%- 11.98% (APR)*

Fixed Rates: 3.49% - 12.99% (APR)*

*Rates includes .25% Auto Pay Discount

Variable Rates*: 1.25% – 11.15%

*Rates includes .25% Auto Pay Discount

Variable with ACH: 2.71%- 12.99%

Fixed with ACH: 3.53% - 14.50%

Variable Rates: 6.61%- 9.42% (APR)*

Fixed Rates: 6.98% - 10.74% (APR)*

*Rates includes .25% Auto Pay Discount
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