When undergraduate students and parents are looking to cover education costs—after using scholarships, grants and Federal Stafford loans, of course—additional borrowing to cover that gap is a common solution. One of the common questions asked at that point is, “Which is the better option, PLUS or private loans?”
My response is always the same. To quote my favorite college professor, “It depends.”
First off, a quick debrief on those two options. The Federal Direct PLUS loan for parents is a federal option that can cover up to the cost of education—that’s what the school determines it will cost you to attend. For this loan, the federal government is the lender. (I should also mention that there is a PLUS option for graduate students, but for this discussion I’m talking about the loan for parents.) A private student loan is another option that can cover up to the cost of education. With these loans, private institutions, like Wells Fargo, are the lenders.
Which option borrowers choose depends on a number of factors. Before making the choice between a PLUS or private loan, there are a few high level things to consider. Please keep in mind this list is not exhaustive, but I hope it gives you a starting point to think about a handful of ” It depends” scenarios before borrowing money for your education. Also, when researching the PLUS loan in more detail, be sure to look at the Direct Loans information.
- The borrower: Who is it? Parents of dependent students are the borrowers on a Direct PLUS Loan for parents. Most private loans typically have the student as the primary borrower and require a co-signer. The co-signer doesn’t need to be a parent, but rather someone who meets the lenders credit qualifications. Many private loans allow co-signers to be released after a period of time and certain criteria have been met. (One caveat to remember here: There are some private student loans where the parent is the primary borrower.)
- Fees. PLUS loans charge a fee on each disbursement of funds. Private loans fees vary. Many are available with no upfront fees.
- Interest rates. The PLUS loan is a fixed rate loan with a current interest rate of 7.9%. Private loans tend to have variable interest rates determined by the credit of the student and co-signer. Currently, borrowers and co-signers who have a strong credit history could be offered rates well below the PLUS loan rate. Remember, private loan rates will vary depending on what happens to the index (typically Prime or LIBOR), plus a spread the lender is using to determine pricing. Some lenders are beginning to offer fixed rate private loans as well. The best way to determine which option has the best rate for you is to apply for both and do the math.
- Terms (length of repayment). Private loans vary by lender, 10-20 years is common. PLUS has several repayment options, the standard is a 10-year term. Be sure to understand the terms you are offered and if they are flexible.
- Repayment. Sixty (60) days after the final disbursement, PLUS loans enter repayment, but parents may request a deferment while the student is in school. Private loans vary, but most where the student is the primary borrower do not require payments while in school. Repayment usually begins six months after graduation or a student leaves school. Repayment options vary among lenders. Make sure you understand your options when it comes to repayment as well as deferment and forbearance before selecting a loan or lender. On both loans, interest will accrue once the money has been disbursed.
Think about the amount of time you spent choosing your school—I encourage you to think with the same rigor about how you will pay for it.