PLUS or Private Student Loan: Which is Right for You?

June 14, 2010 | posted by Peter Carroll.

Once a student has maximized all of their available financial aid, including grants, scholarships, work-study and Stafford loans, they may discover they still need a loan to fill their funding “gap”. For these students, there are typically two options to consider: a Federal Direct PLUS loan for parents from the Department of Education or a private student loan made by a bank or non-profit credit union. Each has benefits and drawbacks, but how do you know which one is best for you?

Chart of Attributes – PLUS vs. Private

Below is a list of various attributes of both the PLUS and Private loan options along with their tradeoffs. Please note that this list is not exhaustive, and we encourage you and your family to consult with your school’s financial aid office or a trusted financial advisor to discuss these options in order to arrive at the best possible decision for your circumstances.

Attribute	Federal Direct PLUS	Private
Interest type	Fixed rate loan is more predictable and thus desirable to families that are risk averse	Variable rate loans, typically based on an index such as LIBOR or Prime rates plus a margin applied by the lender. It is arguable that these indexes are at historical lows and have nowhere to go but up. However, lenders may opt to lower their margins to stay competitive with the PLUS loan.
Interest rate	7.9%	Range of 4% to 14% depending on credit quality
Fees	4%	0-8% depending on lender
Term	10 years	10-20 years
Credit Eligibility	Looser – credit report should show nothing currently derogatory	Stricter – FICO based scoring looks at pattern of behavior over time
Borrower	Parent	Student
In school deferment	None – payments begin 60 days after disbursement	Most lenders offer full deferment and interest only options while in school.
Grace period	None – parents have to apply for hardship deferment	Students typically have 6 months after graduation to wait before having to start paying principal and interest.
Hardship deferment Options	More options for pausing your payments in cases of financial hardship	Options vary lender to lender
Application process	Borrower must complete FAFSA financial aid form, then apply online for the PLUS loan at the Department Website	Borrowers can compare their options at www.overturemarketplace.com to increase their chances of obtaining the best rate possible, then apply with the lender of their choice immediately online.

What Do These Differences Mean?

There is no silver bullet answer about which loan product is best. Generally speaking, we tend to advise families to first look at the Direct PLUS loan for parents. We do this because as a fixed rate loan, it provides a measure of comfort for families who are not savvy price shoppers and not accustomed to paying attention to interest rate movements and market options for variable rate loans. PLUS loans also tend to have more flexibility for deferring payments than private student loans in cases of financial hardship.

That said, there are virtues to the private student loan. Even though it is a variable rate loan, rates are very cheap right now. The average interest rate offered by participating lenders in the Student Loan Marketplace is 6.24% with zero fees. We see some borrowers obtain rates as low as 4.5%. This is significantly lower than the 7.9% interest rate with 4% origination fees offered by the Federal Direct Loan Program.

Even if interest rates do start to rise steadily (as many economists expect they will do), there is still considerable headroom before a private student loan borrower will start paying the rates offered by the PLUS loan program. We also frequently speak with students who plan to pay off the loan quickly after graduation, either due to an expected employment signing bonus or other future cash flow options that they know will be available to them.

But perhaps the single biggest reason we hear from students who choose a private loan over a PLUS loan stems from the fact that a PLUS loan is for a parent and a private student loan is for a student. There simply are many parents who are unable to take on the debt burden for their son or daughter’s education and, as such, a PLUS loan is simply not an option for them. In these cases, the private student loan makes more sense for the student, particularly if they can find a credit-worthy co-signer to keep their interest rate low.

In conclusion, a careful examination of the attributes of each loan, along with the specifics of your family’s circumstances, will help you determine which product type is the best fit for your financial situation. Just be sure to remember that if you decide a private student loan is the best option to fill your funding gap, we believe comparison shopping at the Student Loan Marketplace will increase your chances of receiving the best possible rate and terms.

Photo Credit: Bubbels (sxc.hu)

Written by Peter Carroll

Peter Carroll is a co-founder of Overture and leads its Higher Education business. He can be reached at pcarroll at overturecorp dot com or on twitter at @overture_peter.

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Islandrosebud

does anyone know if my mom's ex husband can co-sign a PLUS loan for me?
overture_peter

Hi Islandrosebud

First thing I will say is to make sure you contact your financial aid office at your school and speak with a financial aid counselor to double-check my answer. It is always wise to consult with them.

Also I am assuming your mom's ex-husband is not your biological father. Please let me know if that's not correct.

PLUS loans are available to parents of financially dependent students. GradPLUS is another loan program available to graduate and professional students. Both are offered by the Department of Education.

Your question implies that you're both the student and the borrower. If that's the case, you must be referring to the GradPLUS program. If that's true your mom's ex-husband can serve as the endorser/co-signer for your GradPLUS loan application.

But if you're an undergraduate student, then by definition you cannot be either a PLUS or GradPLUS borrower. You need one of your parents to be the borrower for the PLUS loan program. Here is a link to the Department's PLUS loan webpage – http://ow.ly/27Ei6. This provides a nice overview of parent eligibility. Note the link that says “Stepparents.” By my read, your mother's ex-husband can serve as the endorser/co-signer for your mother but cannot be part of the loan application with your mother (since they're divorced).

So in summary your mom's ex-husband can endorse/co-sign your mother's PLUS loan application or your GradPLUS loan application.

Note: Whether you're an undergraduate or graduate student, should first maximize your Stafford loan eligibility before considering any additional loan – including the PLUS or GradPLUS loan. Here is a link to the Department's Stafford loan page which has a nice table of loan limits (the amount depends on whether you're financially dependent from your parents and your year in school) – http://ow.ly/27F2e

I hope this helps. If you were under the impression that as an undergraduate student you could apply for a PLUS loan instead of your mother (your question made it sound like that might be the case), shoot a note back and we'll give you some other ideas.
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