Weigh Borrowing Parent PLUS, Private Loan for College

To fill a gap in funding for her son’s college bill, Lisa Bright was faced with a decision: take out a federal Parent PLUS loan or apply for a loan from a private financial institution.

With the help of a college financing adviser, she weighed the pros and cons. The Parent PLUS loan offers easy approval and quick turnaround time, she says, and has the potential to be eligible for some federal repayment and forgiveness programs.

On the other hand, some private student loans offer lower interest rates, compared with the 7 percent rate for PLUS loans, which also have an origination fee.

Ultimately, the lower interest rate offered by a private lending institution – where she and her husband found a rate a little higher than 5 percent – won her over.

“The Parent PLUS – I think the interest rate is a bit high,” says Bright, who lives in Drexel Hill, Pennsylvania. “The private loans take a little more time, probably two to three weeks, but it’s totally worth it.”

[Consider this before borrowing a PLUS loan for your child.]

Most experts recommend that students first max out on federal direct loans, both subsidized and unsubsidized, because of important deferment, income-based repayment and loan forgiveness options.

But if families still find themselves needing to borrow more, they may face a choice between taking out a Parent PLUS loan or a private loan.

Be sure to consider these key differences in ownership, terms, interest rates and approval requirements.

Responsibility: Offered by the Department of Education, the Parent PLUS loan is shouldered by the parent of a dependent, undergraduate student. That responsibility cannot be transferred to a student.

Persis Yu, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, warns that there’s some confusion over this, and she’s seen borrowers who thought they were co-signing a loan for their child or thought the child would be able to take it over when he or she graduated.

“Certainly a child could make payments on the loan, but the loan is entirely the responsibility of the parents,” Yu says.

A student could take out a private loan, but if a parent needs to co-sign, he or she is still liable for repayment.

“Co-signing kind of defeats the purpose,” says Mike Sullivan, a consultant at Take Charge America, a nonprofit credit counseling agency. “If you co-sign for a loan, it is your loan.”

[Find out how to transfer parent PLUS loans to a child.]

Interest rates and fees: The interest rate for PLUS loans is set at 7 percent. Private student loan rates can be lower but depend on an applicant’s credit worthiness and demonstrated ability to repay. Some fixed-rate private student loans start less than 5 percent.

PLUS loans also require a loan fee of 4.276 percent for loans taken out after Oct. 1, 2016. That means a parent pays a fee of $427.60 on a $10,000 loan.

“It’s not a good rate to begin with, and then they add the fee on top, which makes it even more expensive,” Sullivan says.

But borrowers need to be careful because many private loans offer variable rates, Yu says, which may look attractive at first but have the potential to rise dramatically.

“We’re talking about products that have very long amortization time frames,” says Yu. “Usually we’re looking at 10 years, possibly 25 or 30. If you have a variable interest rate, there’s a lot of time for that to go up.”

[Take these steps to understand student loan interest rates.]

Terms: Parent PLUS loans have only some of the perks of other federal loans. Borrowers can request deferment or forbearance, which is a period when monthly loan payments are temporarily suspended or reduced. There are also certain cancellation rights that apply, such as disability or death discharges.

“It’s not very comforting to say, ‘Oh, if you or your child dies, you won’t be on the hook for the loans,” Yu says. “Nobody thinks about that, I’m sure, when they’re taking out a loan, but it actually has caused a lot of problems.”

Parent PLUS loan borrowers are eligible for extended and graduated payment plans but not some of the income-driven repayment plans available for other federal loans, such as Revised Pay as You Earn, income-based repayment plan and Pay as You Earn. They can become eligible for income-contingent repayment if they consolidate, but “borrowers need to go through some fancy footwork,” Yu says.

“The payment plans are generally more flexible than private loans but not necessarily as flexible as other types of federal loans,” Yu says.

Private loans don’t offer income-based repayment. Other terms will vary based on the lender. They may offer deferment on payments while a student is in school, or a brief forbearance, but interest will likely continue to accrue.

Approval requirements: Parent PLUS loans require a credit check, but there’s no “ability to repay” standard as there is in the private market, Yu says.

PLUS loans also have generous limits, allowing parents to borrow up to the cost of attendance, minus any other financial assistance. That might seem like a plus but can lead to problems down the line.

“This is somewhere where we see a lot of vulnerable parents take on this debt without fully appreciating what they’re taking on,” Yu says.

Trying to fund your education? Get tips and more in the U.S. News Paying for Collegecenter.

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