parent PLUS loan vs. private education loan
Posted : July 6, 2005
Last Updated : July 7, 2016
If there is a gap between the amounts of student aid or free money your child is receiving and the total amount of money that he will need for college, then you and your child may need to consider more loan options. The Parent Loan for Undergraduate Students and/or a private education loan are just two loan options that you and your child could choose to fill this gap. Consider the following questions to help you decide which one (if either) is right for you and your student.
Who is responsible for repayment? The parent or guardian takes out the Parent Loan for Undergraduate Students (PLUS) and is responsible for repayment. On the other hand, many private education loans make the student responsible for repaying the loan but sometimes require the parent to cosign. This makes the parent responsible for repaying if the student should fail to make timely payments on the loan.
What is approval of the loans based on? For a Parent PLUS loan, approval is based on the borrower's credit standing. For a private education loan, the borrower must meet minimum income and debt-to-income ration requirements as well as pass a comprehensive credit check.
How much money can be borrowed? For the Parent Loan for Undergraduate Students, one can borrow the total cost of the student's education minus the total financial aid. For the private education loan, program limits apply. See specific loan terms for details.
How much will it cost? Interest rates on Parent PLUS loans are market-based, so they will fluctuate from year to year. However, once the loan is issued, the rate is locked in. Rates for Parent PLUS loans are capped at 10.5%. For the current year interest rate, view our federal student loan comparison chart. Private education loans have fixed and variable interest rates and usually have a higher interest cap. See specific loan terms for details.
Do the terms ever change? As menioned above, interest rates on Parent PLUS loans will fluctuate from year to year, but once the loan is issued, the rate is locked in. Private education loans could be fixed or variable depending on the terms. If interest rates in the current financial market appear to be lower than your original interest rate or you are no longer taking out additional loans on your child's education, you may want to consider refinancing or consolidating your loan into one (possibly lower) monthly payment. Student loan borrowers have the option of consolidating or refinancing through the Federal Direct loan consolidation program or through a private lender, such as ELFI. Specific requirements exist for eligibility in these programs based on your financial profile, so be sure to research whether student loan refinancing or consolidation is right for you.
When does repayment begin? For the Parent PLUS, repayment begins 60 days after receipt of initial disbursement of funds. For the private education loan, the repayment period will depend on the specific terms of the loan.
What are the features and benefits?
Parents may qualify for the Parent PLUS loan regardless of income or asset levels.
The Parent PLUS loan is federally insured and is discharged in the event of total and permanent disability or death.
It is a tax-favorable alternative to using home equity or savings to pay for your child's education.
It offers unemployment and economic hardship deferments.
Private Education Loan
Private educational loans are not deadline driven, which means students may apply whenever the need arises.
Money from a private student loan is generally available for use within days of approval.
Funds are disbursed directly to student's account (for some loans).
For those of you with recent college grads going off to graduate school, your child may be interested in taking out a Grad PLUS loan. The main difference between the Parent Loan for Undergraduate Students (PLUS loan) and the Grad PLUS loan is that the student is the borrower of the latter, not the parent. For more information about loans and the application process, contact the financial aid office at your child's college.