Private Loan vs. the Parent Plus
If you’ve been listening to the news you might have heard that there are historically low interest rates. With that good news, it might come as a surprise to you when you look at interest rates for federal student loans. Starting July 1, interest rates for the Direct Subsidized and Unsubsidized student loans are going to 6.8% and the Direct Parent Plus Loan is going to 7.9%! With those higher interest rates; especially on the Parent Plus loan, families may be wondering what they can do to help lower these expenses.
One thing is to consider taking out a private student loan instead of a Direct Parent Plus Loan. They can offer lower interest rates based on your credit rather than a standard interest rate like the federal government, thus offering you the option to shop around for a cheaper rate!
Comparing PLUS to Private Loans
Besides the obvious difference of the interest rate on the two types of loans; parents should also compare a few other items. First, it’s important to remember who is actually responsible for the loan. On the Direct Parent Plus loan; obviously, the parent is fully responsible for applying and repaying the loan. When it comes to a private student loan, the student is actually the one who applies for the loan. Most of the time the bank will then ask for a co-signer and at this time a parent that co-signs on the loan helps share the responsibility of paying back the loan.
Another thing to keep in mind is that the Direct Parent Plus Loan’s interest rate is fixed. So even if interest rates sky rocket, the loans you took out at the 7.9% interest rate will stay at that rate until you are done paying off the loan. Private lenders offer loans that have both variable and fixed interest rates so it’s important to know what type of interest rate you and your child are being offered if you do decide to apply for a private loan instead of the Direct Parent Plus.
It’s important to remember that with both loans you can borrow up to the Cost of Attendance. If you were deciding to use the Direct Parent Plus Loan to cover not only tuition but some living expenses for your child, you can still do that with a private loan!
With the biggest benefit of a private student loan being the chance for a much lower interest rate, you may be surprised that there are some other great benefits. For some parents, the decision to have their child sharing the responsibility of the loan and the cost of their education is a great tool to use in teaching them some fiscal responsibility. Budgeting and managing your finances is a lesson everyone has to learn!
A great feature that many private lenders offer is a co-signer release. This means that after the student graduates and makes a set number of consecutive on-time payments, they have the potential to remove their co-signer from their loan. That’s great news for a parent who may not be able to help their child as monetarily as they wanted, but still wanted to support their child in their education. It’s also another great tool in fiscal responsibility that we talked about earlier. Keep in mind that there can be additional requirements in the co-signer release so make sure you check out each lender’s option.
Finally, while both the Direct Parent Plus and the private loan allow payments to be made while the student is in school, only a private lender can reward you for making those payments! Many private lenders offer money saving options for electing to make payments while in school. While you can make payments on the Direct Parent Plus while your child is in school, this will only lead to reducing any of the accrued interest or principle, but won’t lower the interest rate.
Remember, if you elect to co-sign on a private loan for your child’s education, you are doing just that: co-signing. For some families this shared responsibility might not be the best. Just like any loan you are considering, educate yourself and decide what is best for your family. Review your options and discuss them with not only your child but also with the financial aid office on campus. The opinions and suggestions given are just that: opinions and suggestions. Only you will know what will work best for your child and how much fiscal responsibility they can handle!