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A brief guide on how to choose parent-student loan

There are two major sources of student loans–federal and private. While federal loans are funded by the government, private loans are lent by individuals or private organizations. Both types of loans come with their set of pros and cons. Federal loans offered to students who wish to pursue studies with financial aid come in several types such as subsidized loans, unsubsidized loans, PLUS loans, and consolidation loans based on the eligibility criteria. Under PLUS loans, parents may borrow Parent PLUS loans to aid their dependent undergraduate child’s education (Commonly called Parent-Student loans), and graduate students can borrow Grad PLUS loans to pursue further studies.

Further, loans can be categorized based on who will repay the borrowed amount—student or parent. Some types of loans are directly given to the student who will be entitled to repay upon graduation, and parent-student loans can be borrowed by parents who wish to repay the amount to fund their child’s education. While there is a private organization who lend parent-student loans to parents who borrow to help their children, there is a federal parent-student loan programme (commonly known as the Parent PLUS loan) which is completely funded by the federal government enabling the borrowers to enjoy few perks of other federal loans.

If one is a parent looking out for helping their children with their student loan payments, it is necessary to compare the pros and cons of both federal and private loan options before making a decision.

Advantages of federal (Parent PLUS) loans over private loans:
– The approval is easy and the turnaround time is quick compared to private loans which take about two to three weeks. It is eligible for some federal repayment and forgiveness programs (monthly loan payments are temporarily suspended or reduced for some period) which is not offered by private loans. It offers flexible loan limits with no maximum amounts and can be used to cover any education costs like transportation, supplies, etc. that are not covered by other financial aid.
– The interest rate is fixed and constant throughout the repayment term (6.31% for loans borrowed in 2017) which is less compared to private loans offered with variable rates which may look attractive at first but may rise exponentially during the term.
Borrowers can avail deferment or forbearance up to 3 years as compared to the forbearance of 1 year given by private loans (if the loans are consolidated or have more than $30,000 in federal student loans).
– Certain cancellation rights or loan discharges apply in case a borrower (parent) or the student faces a total disability or death/loss of life while most private loans do not offer this advantage.
The credit underwriting is more relaxed for federal loans. The borrower of a Parent PLUS should not have any adverse history, but the credits scores are not considered. Private loans require the parents to have a good credit score and apply certain minimum income requirements.

Disadvantages of federal (Parent PLUS) loans over private loans:
– Since the interest rate is fixed, it seems to be a bit high in comparison to private loans offered at a maximum of 5 percent.
It requires a loan origination fee along with a loan making it more expensive (a 4.276 percent loan fee for loans borrowed after Oct. 1, 2016, means one has to pay a fee of $427.60 along with a $10,000 loan).
– Borrowers are not eligible for some of the income-driven repayment plans available for other federal loans (income-based repayment plan, Pay as You Earn, Revised Pay as You Earn, etc.) compared to traditional student loans.
– Parent PLUS loans do not have a co-signer plan (an endorser is required if the credit history is poor) while the private loans require a co-signer who also needs to sign a co-signer release option (this is not required for an endorser).

Eligibilities and requisites to avail parent PLUS loans:
– The parent and the dependent student must satisfy the same conditions as that of availing any federal student aid or loans.
– Students must be enrolled in college or a career school for a minimum of a half-time basis.
– The annual loan is limited up to the full annual cost of attendance (COA) after removing the benefits of other financial aid received by the student. (COA includes tuition fees, room and board, books, supplies, equipment, transportation, and miscellaneous personal expenses).
– Both the parents can take out separate Parent PLUS loans with a separate Master Promissory Notes (MPNs) in case they are divorced. However, the combined Parent PLUS loans cannot exceed the loan limits. Biological parents, adoptive parents, and step-parents who are currently married to the other parent of the student are all eligible to avail this loan if the student is dependent on them.
This loan amount must be used only for educational purposes.

Key points to consider before opting for a parent-student loan:
It is better if a child utilizes the eligibility for Direct Loans completely before any of the parents borrow from the Parent PLUS loan program. Federal student loans have a lower interest rate and fees. Hence, borrowing Direct Loans before Parent PLUS Loans will save the family money.

In some cases, private lenders allow borrowers to refinance old federal parent-student loans with a higher rate of interest (fixed rate) to private parent-student loans or private student loans with the lower interest rates (fixed rate) by indirectly transferring the debt from the parent to the student. The bottom line is that it is altogether a new loan with new terms and not an older one. It makes sense only if the student is not overburdened with more debt and can repay the debt responsibly with sufficient income after graduation. If not, the parent who will still be a consignee in the private loan will be responsible for the repayment.

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