When Parents Should Borrow Private Before Federal Student Loans
There is seldom a time when students themselves should borrow private loans before federal student loans. However, there are good reasons why parents should borrow private loans in total, or instead of a partial federal parent PLUS loan. Here’s why:
1. The interest rate is lower.
When a parent has the credit to get a loan privately for half the interest rate of a parent PLUS loan, the savings can be substantial over the life of the loan. Let’s say a parent borrowed $30,000. The monthly payment differences for a ten-year loan is $50. That's $6,000 total. This doesn’t include the origination fee charged on federal loans.
2. The loan will be paid back quickly.
Generally, private student loans don’t have origination fees. Federal student loans do. Since the origination fee can be as much as one year’s interest on a private loan, it makes sense, if paying off the loan within a year or two, to borrow privately. If paying off the loan within the school year, also look into tuition repayment plans. University tuition repayment plans can offer an interest-free option if paying off the loan by the end of the year. Find out about what your school offers by calling the student accounting office. Always compare all your options.
3. You have an emergency fund.
While private student loan lenders may offer a payment break if you hit an economic roadblock, federal student loans have guaranteed breaks, provided you meet the conditions necessary for approval. It's important, if you choose a private student loan, that you have enough of an emergency fund built up that you can still make payments in the event of unemployment or another financial setback.
4. Part of the money will be paid back quickly.
No one says you have to choose only one option. For instance, let’s say you know you’ll borrow $80,000 over the course of your child’s college education. You know you can pay off $5,000 each year. Of the remaining $60,000, you could pay back $10,000 within four years and have emergency savings to cover payments if needed. So you take a low-interest rate private loan for this amount. Finally, you choose a federal PLUS loan for the remaining $50,000 because of the guaranteed payment breaks and longer repayment term.