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 in 2020, you may find a better deal elsewhere.
The hidden costs of PLUS loans
There are a few things to be aware of before you take out a Parent PLUS loan. The first thing to know is that federal loans for parents come with a higher interest rate than federal loans offered to students. As of July 1, 2020, federal student loans will be offered at a rate of 2.75%, while PLUS loans will be offered at 5.3%.
Currently, multiple private lenders are offering extremely competitive rates on fixed-rate loans, as well as variable-rate loans that are well below the federal parent rates. We'll discuss those in a minute.
Putting the interest rate aside, there are a few other drawbacks to PLUS loans.
PLUS loans come with an origination/disbursement fee of 5.3%, 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.
1. Sallie Mae Parent Loan
As of August 2020, Sallie Mae is currently offering parent loans starting at 3.50% 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.
There are no hidden costs. 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.
Learn more about Sallie Mae student loan options here.
2. College Ave Parent Loan
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 stress-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 August 2020, College Ave Parent Loans are being offered at starting rates of 1.24% APR for variable rate loans and 3.59% 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.
3. Citizens Bank Parent Loan
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. An interest rate 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 August 2020, Citizens is offering parent loans at starting rates of 2.16% APR for variable-rate loans and 4.69% APR for fixed-rates loans. (Those rate assume both the auto-pay and loyalty discounts we mentioned above.)
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.