parent PLUS loan vs. private loan
Posted : July 6, 2005
Last Updated : June 18, 2014
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 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 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 PLUS loan, approval is based on the borrower's credit standing. For a private 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 loan, program limits apply. See specific loan terms for details.
How much will it cost? Interest rates on 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 PLUS loans are capped at 10.5%. For the current year interest rate, view our federal student loan comparison chart. Private loans have variable interest rates and usually have a high interest cap. See specific loan terms for details.
When does repayment begin? For the PLUS, repayment begins 60 days after receipt of initial disbursement of funds. For the private loan, repayment usually begins 6 to 9 months after the student leaves school. With these loans, special program rules may apply.
What are the features and benefits?
Parents may qualify for the PLUS loan regardless of income or asset levels.
The 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 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.