Once you have maximized all of your available financial aid, including grants, scholarships, work-study, and Stafford loans, you may discover that you still need a loan to fill your funding “gap.” When this is the case, there are typically two options to consider: a Federal Direct PLUS loan for parents from the Department of Education, or a private student loan funded by a bank or non-profit credit union. Each has benefits and drawbacks, but how do you know which one is best for you?
Chart of Attributes – PLUS vs. Private
Below is a list of various attributes of both the PLUS and Private loan options along with their tradeoffs. Please note that this list is not exhaustive, and we encourage you and your family to consult with your school’s financial aid office or a trusted financial advisor to discuss these options in order to arrive at the best possible decision for your circumstances.
|Attribute||Federal Direct PLUS||Private|
|Interest type||A fixed-rate loan is more predictable and thus desirable to families that are risk-averse||Variable-rate loans are typically based on an index such as LIBOR or Prime rates plus a margin applied by the lender. It is arguable that these indexes are at historical lows and have nowhere to go but up. However, lenders may opt to lower their margins to stay competitive with the PLUS loan.|
|Interest rate||7.21%||Range of 2.25% to 10.125% depending on credit quality|
|Fees||4%||0-8% depending on the lender|
|Term||10 years||10-20 years|
|Credit Eligibility||Looser – credit report should show nothing currently derogatory||Stricter – FICO based scoring looks at the pattern of behavior over time|
|In-school deferment||None – payments begin 60 days after disbursement||Most lenders offer full deferment and interest-only options while in school.|
|Grace period||None – parents have to apply for hardship deferment||Students typically have 6 months after graduation to wait before having to start paying principal and interest.|
|Hardship deferment Options||More options for pausing your payments in cases of financial hardship||Options vary lender per lender|
|Application process||The borrower must complete FAFSA financial aid form, then apply online for the PLUS loan at the Department Website||Borrowers can compare their options to increase their chances of obtaining the best rate possible, then apply with the lender of their choice immediately online.|
What Do These Differences Mean?
There is no silver bullet answer about which loan product is best. Generally speaking, we tend to advise families to first look at the Direct PLUS loan for parents. We do this because as a fixed-rate loan, it provides a measure of comfort for families who are not savvy price shoppers and not accustomed to paying attention to interest rate movements and market options for variable rate loans. PLUS loans also tend to have more flexibility for deferring payments than private student loans in cases of financial hardship.
Even if interest rates do start to rise steadily (as many economists expect they will), there is still considerable headroom before a private student loan borrower will start paying the rates offered by the PLUS loan program. We also frequently speak with students who plan to pay off the loan quickly after graduation, either due to an expected employment signing bonus or other future cash flow options that they know will be available to them.
But perhaps the single biggest reason we hear from students who choose a private loan over a PLUS loan stems from the fact that a PLUS loan is for a parent and a private student loan is for a student. There simply are many parents who are unable to take on the debt burden for their son or daughter’s education and, as such, a PLUS loan is simply not an option for them. In these cases, the private student loan makes more sense for the student, particularly if they can find a credit-worthy co-signer to keep their interest rate low.
In conclusion, a careful examination of the attributes of each loan, along with the specifics of your family’s circumstances, will help you determine which product type is the best fit for your financial situation. Just be sure to remember that if you decide a private student loan is the best option to fill your funding gap, we believe comparison shopping at the Student Loan Marketplace will increase your chances of receiving the best possible rate and terms.