Paying for your child’s college? Compare Federal and Private Parent Student Loans – US News & World Report Money | Vette Leader

Parents looking to help their children pay for college may have invested in a 529 college savings plan or reviewed a school’s financial aid package. But often the full cost of attending—not just tuition, but books, room and board—isn’t entirely covered by savings or financial aid.

In some cases, parents may consider taking out a student loan on their child’s behalf to bridge the funding gap. There are two primary college loan options for parents: federal parent PLUS loans and private student loans.

According to the U.S. Department of Education, about 3.7 million borrowers have Parent PLUS government loans with an outstanding balance of $104.8 billion as of the first quarter of 2022. That doesn’t even include parent student loans, which are more likely to be from private banks and lenders than offered by the federal government.

When trying to decide whether you should borrow federal or private loans on behalf of your college student, here are some important differences to consider:

  • Interest rates and fees on the Parent PLUS loan are set by the Department of Education based on the timing of the loan. PLUS loans have the highest interest rates of any federal student loan.
  • The interest on the private parental loan can be fixed or variable and depends on the creditworthiness of the borrower. Personal loans may offer lower interest rates than federal PLUS loans for well-qualified applicants.
  • Parent PLUS loans have federal protections such as B. School deferral and consolidation of student loans to achieve income-related repayment. You may also be eligible for government loan forgiveness.
  • Private loans are not eligible for income-tested repayments or federal student loan forgiveness programs. Private lenders may have their own hardship programs, such as forbearance or forbearance.

Federal vs. Private Parent Student Loans

Parents PLUS loan

Private Student Loans

interest type

Firmly

Fixed or variable

interest rate

7.54%*

Fixed interest from 2.99%**

Variable interest from 0.94%**

credit brokerage fee

4.228%*

Varies depending on the lender

Loan Repayment Period

10 to 25 years

5 to 20 years

credit limits

Up to the cost of the school minus federal grants

Up to the cost of the school; Some lenders have set limits

credit requirements

No recent derogatory marks like foreclosure or bankruptcy

Good credit (mid-600s) or well-qualified co-signer

degree type

Can only be used for students

Can be used for bachelor’s or master’s degrees

Option to co-sign with the student

no

Yes

*Federal student loan rates and fees for the 2022-23 academic year.

**Depending on credit conditions and creditworthiness. Including autopay discount.

This is how you decide between a Eltern-PLUS loan and a private student loan

There is no one-size-fits-all solution to university borrowing for parents. The best type of student loan for parents depends on the unique financial situation of your household.

First, you should carefully read your child’s grant letter, which details the total cost of attending and any federal loans or grants he or she will receive. You must also consider your own creditworthiness and income, as well as your ability to afford the monthly student loan payments.

The following factors can help you decide between a government or private parental loan.

When to Choose a Parent PLUS Loan

  • You have a fair credit rating. Because Federal PLUS loan interest rates depend on when the loan is originated – not the applicant’s creditworthiness – bad credit does not translate into higher interest rates. However, you must prove that you do not have a negative credit history, such as a recent foreclosure or bankruptcy.
  • They intend to use federal safeguards. While Parent PLUS loans are not eligible for income-based repayment plans, you may be able to qualify by consolidating them into a new federal student loan. Direct consolidation loans can be repaid under an income-based repayment plan.
  • You are a civil servant or a non-profit worker. If you took out a Parent PLUS loan on your child’s behalf, you may still be eligible for the Public Service Loan Forgiveness program, or PSLF. Eligibility is based on the borrower’s qualifying employer rather than the student’s employer.

When to choose a personal student loan

  • You have a very good or very good credit rating. The interest rates for the private parental loan depend in part on the creditworthiness of the applicant. Parents with excellent credit and a low debt-to-income ratio qualify for the lowest student loan rates available — which can be much better than Parents PLUS loan rates.
  • You want a variable interest rate. While Parent PLUS loan installments are fixed for the life of the loan, private loan installments can be fixed or variable. You may want to choose an adjustable rate if you want to pay off the loan quickly while interest rates are low, but adjustable rates come with the risk of your monthly payment increasing over time.
  • You want a shorter loan term. Federal parental loans have a standard repayment period of 10 years, but private parental loans can be repaid in as little as five years. A shorter loan term translates into lower borrowing costs over time because you make fewer interest payments.

Compare the cost of federal and private student loans

Repaying a $10,000 parent-student loan

repayment period interest rate* rental fee Monthly payment interest costs
Federal parents PLUS loan ten years 7.54% $423 $119 $4,269
Short term personal loan 5 years 4.24% As low as $0 $185 $1,115
Medium-term personal loan ten years 5.54% As low as $0 $109 $3,047
Long Term Personal Loan 15 years 6.94% As low as $0 $90 $6,149

*Estimated interest rate for personal student loans based on good credit.

Alternatives to Parent-Student Loans

While many parents take out student loans on behalf of their children, it may not be the right strategy for your unique needs. Paying for your child’s college can make it more difficult for you to save for retirement, invest in your future wealth, or improve your own financial situation. Here are a few alternatives to borrowing parent student loans:

Be a co-signer for your child’s student loans

When you borrow a student loan for parents, you are solely responsible for paying back that debt. In other words, your child would not be legally required to help you pay off the debt, and you are the only party who has to make the monthly payments.

You might instead consider having your child apply for their own private student loan with you as a co-signer. This can help your loved one apply for a private student loan with more favorable credit terms, such as B. a lower interest rate to qualify. This means that both parties are responsible for paying off the debt, not just the parent. In the long run, being a co-signer on a student loan could also help your child build a better credit history.

If your child has consistently made on-time student loan payments, you could be removed from the loan as a co-signer. This is known as a co-signer release and would eliminate your financial obligation on the loan.

Pay from your income or savings

According to Sallie Mae, the vast majority of families — 85% of them — depend on their parents’ income and savings to pay for college. If you have the necessary cash to help your child cover college expenses, this option is a better financial alternative than taking out a student loan in your own name.

By using a college savings fund, you avoid paying the interest and fees charged by lenders on student loans. It also ensures that you don’t add an extra debt payment to your monthly budget. Just make sure you don’t use up your retirement nest egg or emergency fund to pay for your kid’s college.

Opt for a cheaper school option

For some families, lowering college costs instead of borrowing more money may be the right solution. You should pursue all of your grant and scholarship opportunities in addition to these strategies:

  • Start your child at a community college. Many states offer low-cost or tuition-free community colleges for certain students. Some even offer two-year community college paths that guarantee students admission to a state public school if they meet certain requirements. As a bonus, your child may be able to live at home during enrollment, which can reduce overall room and board costs.
  • Find a cheaper school. Choosing a public school over a more expensive private college can help ensure your student is financially stable after graduation. According to an analysis by US News, the average cost of tuition and fees at a prestigious private higher education institution for the 2021-22 academic year was $38,185. By comparison, annual public college costs at ranked schools were $10,388 for in-state students and $22,698 for out-of-state students.
  • Support a part-time job or dual studies. With the rising cost of college, it’s unlikely your child can afford to get through college with a part-time job alone. But even a modest paycheck can certainly weigh on the overall cost, and a dual degree program can help your student make connections in a field that can stretch far into a professional career.

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