COMPARING FEDERAL PARENT PLUS TO PRIVATE STUDENT LOANS

Are you an undergraduate student considering a private student loan? Or a parent?

Private student loans should be the financing option of last resort, because they do not have the same favorable terms as federal Stafford loans for students and PLUS loans for parents.

All students should take out the maximum Stafford loan first. If you need additional financing beyond the Stafford loan limit, the main choices are federal parent PLUS loans or private student loans. VSAC strongly recommends going with the PLUS loan. Here’s why:

Interest rates
Parent PLUS loans have a fixed interest rate, so you know how much you’re going to pay over the life of the loan. Private loans normally have variable interest rates with no maximum. That can mean a very large debt to pay once the interest is added in. Even though rates may seem fairly low now, what will happen over the fifteen or more years of repayment after college?

Flexible repayment
The PLUS loan allows you to suspend payments while your child is still in school and offers flexible repayment options. While private loans typically suspend payments while the student is in school, there is very little flexibility once repayment begins.

Payment responsibility
Frequently, a private student loan looks appealing because it is in the student’s name. And, after all, it is the student receiving the education who has a lifetime of earning potential ahead of him or her. However, consider that although the student takes out the loan, he or she will likely need a cosigner – usually a parent. That leaves the parent equally responsible – so the loan affects the parent’s credit rating just like a PLUS loan would and may ultimately become the parent’s debt to pay.

Death/disability cancellation
In the case of a parent PLUS loan, the debt is cancelled completely if the student dies or the parent borrower becomes totally permanently disabled or dies. Private loans do not usually have these protections.

The bottom line? Plan ahead for how much you think you’ll be able to repay each month, and look for the least expensive loan. Usually, that will be the Stafford loan for students and the PLUS loan for parents. Only if the PLUS loan is not an option, such as for independent undergraduate students, should you consider a private student loan.