After discussing the cost of college and who will pay, you can start to plan how to finance it. In this article, we will discuss a parent plus loan and private loan.
Your student may need additional money to pay for school, beyond the federal loans they have. You might be willing to lend a hand. This is where PLUS loans (also known as Parent PLUS loans) and private student loans can help. PLUS loans can be issued by the federal government to qualified students who are enrolled in school. Parents may also be able to borrow money to finance their child’s education. There are also private loans from private lenders, such as banks.
You can decide which option is better for funding college education by understanding the differences between parent PLUS loans and cosigned personal loans.
How Federal Parent PLUS Loans Work?
To apply for a PLUS loan you will first need to fill out the FAFSA (Free Application For Federal Student Aid). FAFSA is a free application for federal student loan aid that allows the US Department of Education to determine your family’s eligibility for which types of federal loans. Because the federal government pays interest on federal loans while students are in school and during any grace periods, or deferments, the federal government should be maxed out on subsidized loans first. However, students may be eligible for an unsubsidized federal loan. There is a limit on how much you can borrow each year from the government. This is very low when compared to many schools’ tuition costs.
A Parent PLUS loan’s fixed interest rate means that it will not change over the course of the loan’s life. The interest rate on Parent PLUS loans for 2019-2020 is 7.08%. This means that although your credit history and repayment history will be examined to determine eligibility, you won’t be eligible for a lower rate of interest if your credit score is high.
The cost of school attendance plus any financial aid received is the maximum amount you are allowed to borrow. Remember that the Department of Education doesn’t review your income to determine if the loan payments are manageable, unlike a mortgage loan or any other type of consumer loan. The upfront origination fee for Parent PLUS loans is also deducted from each disbursement. The fee is 4.236% currently.
Although you can request a delay so that payments are not due until six months after the student graduates or leaves school (or earlier), interest will still accrue.
The Parent PLUS loan, which is unlike many other student loans options, will be held in the parent’s name and cannot transfer to the student. You, the parent, will be legally responsible for repaying it.
You have many options when it comes to repayment plans for these loans. This allows you to choose the one that best suits your financial needs and your future goals. You can also consolidate Parent PLUS loans. The income-driven payment plan sets your monthly payments at a level that is reasonable given your income. If you have difficulty paying your monthly payments, you can request a deferment. This allows you to temporarily suspend or lower your payments. Interest will still accrue.
Alternatives to Parent PLUS Loans
Because private loans (and their interest rate) are subject to strong credit history, your student will need a cosigner. That’s you! Although private student loans can have either a fixed- or variable interest rate depending on credit history, the rate will be determined by the applicant and cosigner. A private loan can be cosigned by parents who have a strong financial history to get a lower interest rate than a federal Parent PLUS loan. You and your student share the responsibility for repayment by being a cosigner.
While loan fees vary from lender to lender. The amount of money you are allowed to borrow will depend on your credit history and that of the student and cosigner.
Private student loans do not offer federal loan forgiveness and repayment options. Private lenders might allow you to delay payments until your graduation, while others may require you to make payments while your child attends school. This could save you money in the long term.
Refinances can be done on private loans. You may lower your interest rate, or have your monthly payment reduced depending on your financial situation.
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Federal Plus Loan vs. Private Loan
Fixed rates on loans can be beneficial. You don’t have to worry about rate rises and you know exactly what your monthly payments will be. Parents may want to take advantage of the federal student loan forgiveness and repayment options offered by Parent PLUS loans. For parents with good credit, you may be eligible to cosign a private loan. This will allow you to get a lower interest rate and possibly fewer fees. A good thing is to pay less in interest and fees.
Once you have filled out the FAFSA form and determined what aid and federal loans are available to your student at the schools they are interested in, you should look into additional loans you may be eligible to borrow. You can then shop around to find the right loan for your family.