If you're scrambling to fill a tuition gap for your child, you've probably considered taking out a PLUS loan from the federal government. While it may seem like an easy option — after all, it's right there on the financial aid award letter — it's not always the best option. Why? Because federal parent loans come with a much-higher interest rate than loans offered directly to students. The bottom line is that you may find a better deal elsewhere.
Let's take a quick look at why PLUS Loans (which may also be called Direct PLUS Loans)may not be a good value for parents and then examine three options that may make more financial sense.
Shop around for a lower interest rate first
There are a few things to be aware of before you take out a Parent PLUS loan . First, as we mentioned above, the interest rates for parent loans are not competitive.
Your child's Direct Loan interest rate is currently 4.53%, which isn't bad (although some lenders are offering slightly lower fixed rates at the moment). However, the current PLUS loan rate of 7.08% is not exactly a bargain. Currently, multiple private lenders are offering fixed- and variable-rate loans well below that. We'll highlight a few great deals in a second.
(Table courtesy of Department of Education.)
Putting the interest rate aside, there are a few other drawbacks to PLUS loans.
PLUS loans come with an origination/disbursement fee of 4.236%, which means that your loan principal will increase before you child has even begun class. Most reputable private lenders don't charge an origination fee.
PLUS loans have stringent repayment requirements. If you get behind on payments, your wages could be garnished at a rate of 15% of your disposable income. Any tax refunds or social security payments may be also be subject to garnishment. It's also important to note that cannot transfer your PLUS loans to your child later.
Here are some private loans for parents that may make more financial sense.
As of May 2020, Sallie Mae is currently offering parent loans starting at 3.75% APR for variable-rate loans and 5.49% APR for fixed-rate loans for qualified borrowers. Those rates assume a 0.25% discount for signing up for automatic payments.
Sallie Mae charges no origination fees and there no penalties for pre-payment. Remember, paying ahead every month, even if it's only a few dollars, is a highly effective way to get out of debt faster and save money.
See also: Why Paying Ahead—Even Just a Little—Can Have a Big Impact on Your Student Loans
There are two payments options, including:
- Making interest-only payments for the first 48 months of the loan while your child is in school.
- Making full payments (interest plus principal) while your child is in school so you can get out of debt faster.
College Ave has made a reputation as an innovator in the student loan space over the past few years. Not only does it offer competitive rates, it also lets borrowers choose from up to 11 different plans so that repayment can be a stres-free experience.
One especially cool option: College Ave allows parents the options of having a portion of the loan paid directly to them instead of the student. That way, parents can ensure that the funds are going to legit school and living expenses.
As of May 2020, College Ave Parent Loans are being offered at starting rates of 1.79% APR for variable rate loans and 4.64% APR for fixed-rate loans. (Rates include auto-pay discount of 0.25%.)
College Ave charges no fees for origination or prepayment. Choose from payment plans that emphasize a lower monthly payment or bigger costs savings over the life of the loan.
Learn more about student loan options from College Ave here.
Like College Ave and Sallie Mae, Citizens charges no fees for their parent loans and offers an auto-pay discount of 0.25%. However, Citizens offers an additional loyalty discount of 0.25% for current account holders. A reduction of 0.50% is significant, and definitely worth your attention.
Citizens also offers the convenience of multi-year approval, which allows borrowers to apply once and then extend the loan for each school year. In addition to being convenient, it also prevents additional credit inquiries, which can decrease your credit score.
As of May 2020, Citizens is offering parent loans at starting rates of 3.09% APR for variable-rate loans and 5.48% APR for fixed-rates loans. (Those rate assume both the auto-pay and loyalty discounts we mentioned above.)
Learn more about student loan options from Citizens here.
Not sure if a parent loan is right for you? Check our out pick for the best deals on private student loans that your child can apply for, with or without a cosigner.