Understanding your parent loan options is essential to getting the most affordable financing option to pay for college. Most colleges point parents in the direction of the Federal Parent PLUS Loan. This can be the best option for many families based on the loan features, but for families with excellent and strong credit, there are other loans in the marketplace that are more affordable.
Know how to compare parent loan option to save money.
Before any major financing decision, compare your options.
In order to find the most affordable parent loan option for you, take these three steps.
Step 1. Get essential information about your needs.
To get ready to compare parent loan options, make certain you know the following:
Check your credit score. Private Loans will use your credit strength to determine your interest rate. The better your score, the better your rate. Everyone is entitled to a free credit report from each major credit bureau once every 12 months but that does not include your credit score. Ask your bank or credit card agency if they offer free credit scores as a part of your benefits. Another options is to use a consumer websites like CreditKarma and CreditSesame that offer free credit scores.
Know how much you want to borrow. Some parents are only looking to pay the amount due on their tuition bills. That means you need to double the tuition bill if your student is enrolled in a semester system, or triple it if they are on a tr-semester or enrolled in a quarter system and plan to take the summer off. For families who need help with indirect costs not listed on their college tuition bill like books, off-campus housing, meals, etc., take cost of attendance on your student’s financial aid award letter and subtract all free money, student loans, and work-study to determine the maximum amount you can borrow. Try not to over-borrow. Every dollar you and your student can pay now from income or savings, means less you pay back in the long run.
Step 2. Review the basics on the types of loan options.
Now you are ready to investigate the various loan options like the Federal Parent PLUS Loan, Private Parent Loan, and Private Student Loan.
Federal Parent PLUS Loan. These loans are offered by the U.S. Department of Education for parents to pay the cost of attendance for a dependent student. Parents of dependent undergraduates can borrow up to the cost of attendance minus all other financial aid. Interest rate is a fixed rate at 7.08% for loans borrowed from 7/1/19 to 6/30/20. A 4.17% origination fee is charged for loans borrowed from 10/1/18 to 9/30/19. Standard Repayment Plan is 10 years, but multiple repayment plan options exist. Parents can opt to make no payment while their student is enrolled at least half-time or in their six-month grace period. Interest accrues from disbursement. Unpaid interest is capitalized once prior to entering repayment. Federal Parent PLUS Loan offer several deferment and forbearance options. If a borrower is permanently disabled or dies, the loan will be discharged.
Private Parent Loan. Private lenders such as banks, credit unions, and state agencies offer parents of dependent undergraduates Private Parent Loans. Parents can usually borrow up to the cost of attendance minus all other financial aid. Borrowers can choose either variable or fixed interest rates. Often, Private Parent Loan have no loan fees. Typically, the lender will base the interest rate on the parent’s credit score. Interest accrues from disbursement. Parent typically are required to make at least in-school interest payment while the student is enrolled and then start interest and principal payments after graduation (or the student is no longer enrolled at least half-time). Typically, these loans offer limited deferment and forbearance options and most offer limited loan forgiveness, loan discharge or cancellation options.
Private Student Loan. A Private Student Loan may be offered by a private lender such as a bank, credit union, or state agency for students who want to borrow funds to pay the cost of attendance. Typically, undergraduate students will need a creditworthy co-signer to qualify. Usually, Private Student Loans can be borrowed up to the cost of attendance minus all other financial aid, and interest accrues from disbursement. Interest rates can be fixed or variable and are determined based on the co-signer’s credit score. Generally, Private Student Loan have no loan fees. Most often, borrowers will opt to defer all payments while in-school payment and during the 6-month grace period. Typically, these loans offer limited deferment and forbearance options and most offer limited loan forgiveness, loan discharge or cancellation options.
Step 3. Compare the estimated monthly payment and overall financing costs.
Luckily, we have an easy decision tool that makes this possible in less than one minute. By answering a few questions about the family's financial resources, the amount you want to borrow for the first year, and credit score, then a parent can see personalized funding pathways to finance not just one year, but all four years of college. Our free parent loan financing decision tool lets parents understand how the monthly payment fits into your budget while the student is in school (especially if you choose Private Parent Loan that requires at least interest-only payments during enrollment) and in repayment after graduation.
If a parent needs $10,000 for the first year of college, then most likely they will be borrowing a little over $43,000 for four all four years of undergrad. If that parent has excellent credit (over 800 credit score), a Private Parent Loan can save them almost $13,000 in financing costs over the life of the loan versus a Federal Parent PLUS Loan. Conversely, a parent with good credit (675 to 749) can save almost $4,000 by borrowing a Federal Parent PLUS Loan versus a Private Parent Loan. Nowhere else can you get numbers that help you to estimate monthly payments and financial savings by credit score and personal borrowing needs. Use Pay4Education's tool to educate yourself to set realistic, personalized expectations of in-school and after graduation payment.
Colleen MacDonald Krumwiede is a financial aid expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Pay4 to transform the way families afford college.