Parents looking to help their children with college costs have plenty of options, but it can be difficult to determine the best choice. Federal Parent PLUS loans have some of the same protections as subsidized and unsubsidized direct federal student loans, but they may come with a higher price tag than private parent loans, after fees are considered. Before making the plunge to take on debt to help your child, be sure to research all options to find the most cost-effective solution for your needs.
Generally speaking, Parent PLUS loans may be a better choice for those with lower credit scores or employees working in the public sector who could qualify for public service loan forgiveness. However, parents with strong credit and income may find much lower rates in the private loan market, especially after considering the fees associated with the federal Parent PLUS loans.
It’s also important to make sure you are in a good financial position before taking on any debt to help your child with college costs. You should focus on paying down any high interest debt you may have, and prioritize saving for retirement. Furthermore, make sure your child has exhausted their options for scholarships, grants, and federal loans before taking on debt in your own name.
First things first: complete the FAFSA every year. Your child could be eligible for need-based grants or merit-based scholarships that don’t need to be repaid, and every penny counts. After your child has maxed out their options for free money, next consider subsidized and unsubsidized direct federal student loans, which come with much lower rates than federal Parent PLUS loans. These federal student loans also have more flexibility than Parent PLUS loans when it comes to repayment options.
For the 2018 – 2019 academic year, Parent PLUS loans have an interest rate of 7.60%, with a 4.248% origination fee deducted from each disbursement you receive. This fee is substantial compared to the 1.062% fee a child would pay for their subsidized or unsubsidized federal student loans. Some private loans may have no fees or lower fees for parents, so comparison shopping is key.
Parents applying for Parent PLUS loans cannot have an adverse credit history, but there are no minimum score requirements, and everyone is offered the same rates regardless of credit score. For parents with weaker credit scores, Parent PLUS loans may be the better option since their rates through a private lender may be higher, or they might not qualify. Parents who do have an adverse credit history can still qualify for Parent PLUS loans by obtaining an endorser (cosigner) on the loan and completing PLUS credit counseling. The endorser would be responsible for loan payments if you do not keep up with payments.
Parents with adverse credit are also able to obtain PLUS loans if they can demonstrate that extenuating circumstances are the cause of the adverse credit. This path would require a statement explaining the situation and any supporting documentation to back up your claim. If the appeal is granted, PLUS credit counseling will also be required.
Parents can request a deferment while their child is enrolled at least half-time and would not need to make any payments until six months after the child graduates (or drops below half-time enrollment). Deferment is not required, so any parents who do wish to make payments on the loans can begin doing so after disbursement. Starting payments immediately will reduce the total interest you pay.
For any parents looking to pursue public service loan forgiveness, consolidation will be required. Consolidated Parent PLUS loans will become a federal Direct Consolidation Loan. Depending on the repayment plan selected, consolidated loans can have a repayment term from 10 to 30 years. If you choose an extended repayment term, you can lower your monthly payments.
Income-Contingent Repayment (ICR) is another option which reduces monthly loan payments to either 20% of your discretionary income, or the amount you would pay on a 12 year fixed loan (whichever is lower). The U.S. Department of Education has a helpful calculator to determine monthly payments through its income-driven programs. The repayment term for loans on ICR would extend to 25 years, and after 25 years any remaining balance is forgiven (but the forgiven amount may be taxed as income). ICR is the only income-based repayment option available for Parent PLUS loans, and you will be required to submit income and family size information each year to stay on the plan.
Parents with good to excellent credit may find that they qualify for much lower rates through private loans. Purefy has a “Find My Rate” tool that allows you to compare interest rates among lenders before applying and undergoing a credit check. To use the rate comparison tool, you’ll need to know your credit score (or an estimate of it). Different lenders use different credit bureaus, but a free service like Credit Karma will show your scores through multiple bureaus. Select “In School Loan” and enter your state of residence, your child’s school information, and your email address. After clicking “Find My Rate”, you’ll be able to enter the desired loan amount and see interest rate offers from multiple lenders.
Our lenders offer both fixed and variable rates, along with flexible repayment terms ranging from 5 to 15 years. Fixed rates will stay the same throughout the life of the loan, but they are typically higher than the variable rate of the same term length. It can be risky for lenders to offer low fixed rates without knowing where the market will go, so fixed rates are often higher than variable to account for this risk.
Variable rates are subject to change, so they could potentially increase or decrease during loan repayment, but often start off lower than their fixed counterparts. A variable rate may be the best option if you’re trying to aggressively pay off a loan, or if you’re selecting a shorter term. Variable rates will fluctuate with the market and are tied to a benchmark rate (often LIBOR), with a fixed margin added.
Repayment options vary by lender, but most private lenders will allow interest-only payments or defer payments entirely while in school, if you would like. CollegeAve offers a flat repayment plan of $25 monthly while in school, which can help reduce interest costs. Other lenders like Citizens Bank will offer discounts for automatic payments and setting up a bank account.
In general, the longer that you defer repayment, the more interest you will have to pay in the long run. If you have the means, we always recommend choosing an immediate repayment plan to maximize your savings. If you need to, an interest-only plan (where you only make interest payments while your child is in school) is usually the next best option in terms of overall savings.
Parents also now have many options for refinancing their Parent PLUS or private loans, so those with strong credit and a low debt-to-income ratio could receive lower rates by refinancing. Purefy works with several lenders who offer parent loan refinancing, and exploring your interest rate options only takes minutes with our rate comparison tool.
Select “Parent loan refinancing”, then enter your information before submitting. You can do a soft pull of your credit to get the most accurate quote (with no impact to your credit score), or you can just estimate your score and expenses, if you prefer. You will then be presented with both fixed and variable rate options from our lenders, and you’ll have the option to enter your current loan rate and repayment scenario for comparison. You can also see if adding a cosigner would be beneficial. Clicking the “select” button next to any of the offers will take you to that lender’s application.
Refinancing is also a great way to restructure your loan payments for any financial goal: lengthen your term to lower your payment or shorten your term to get out of debt faster and save on interest costs. Children can also refinance parent loans into their name through our program with PenFed Credit Union.
Our student loan analysts can help guide you through the options, so if you’re feeling stuck just give us a call at 202-524-1115, or email us at email@example.com