Federal PLUS v. Alternative Loans

Today's families can be inundated with a variety of borrowing options. While the UC Student Financial Aid Office encourages all families to reduce reliance on loans, a college education can result in supplementing family resources and be a good loan investment. As always, you want to review what is being covered by loan funds: tuition costs or recurring costs like housing and food?

Sometimes, alternative educational loans are a quick answer as they place the burden of additional loan borrowing on the student v. the parent. While non-federal loans do offer this feature, a more complete comparison of Federal Direct Parent PLUS Loan v. alternative educational loan borrowing is wise. 

Additionally, comparisons show why Federal Direct Graduate PLUS Loans may be preferred over alternative educational loan borrowing for graduate students.

Co-Signer Obligation

Most students seeking a non-federal loan to finance their education will need a co-signer. In most cases, the co-signer will be a parent.

Co-signers, of course, assume the loan in the event that a primary borrower is not making payment or otherwise meeting the terms of the loan. Their obligation can also carry with it additional fees or costs that have been added to the loan while the lender is looking to get payment from the primary borrower.

For parents and step-parents of dependent students who feel the loan borrowing should be in the student's name only, keep in mind repayment must remain in good standing to avoid co-signer obligation. Consider taking out the Federal Direct Parent PLUS Loan in the parent's name and having the student make repayment on the parent's behalf if this is the family's overall desire. Setting up this arrangement automatically alerts the parent if payments are not being made and provides the safety net that the co-signer feature has but places the controls within the family rather than with the lender. 

In cases of graduate students, a Federal Direct Graduate PLUS Loan is in the student's name but may still require an endorser. Overall, terms of the Graduate PLUS Loan should be compared closely with any alternative loan.

Interest Rate & Repayment Amount

Federal Direct Parent and Graduate PLUS Loans are available at a competitive interest rate that compounds annually. Non-federal loan interest rates are more likely to be determined by your credit history so may carry a higher interest rate or a lower one. As well, non-federal loans may compound interest quarterly so the cost of borrowing may be higher.

To get a true comparison, utilize online calculators to show the amount fully repaid under the terms of a Direct PLUS Loan v. the alternative educational loan. This full comparison will give you a more complete picture of the cumulative interest costs associated with each loan program.

Deferment, Forbearance & Forgiveness

Federal Direct PLUS Loans offer a deferred repayment until 6 months after the student graduates or drops below half-time. Even if this may not be an option to automatically exercise for Federal Parent PLUS Loan borrowers, it does help a family with some repayment timing relief when needed.

Federal loans offer no pre-payment/early repayment penalties. Always inquire when taking out other types of loans.

While no one wants to think of the unthinkable, federal loans offer forbearance programs under specific economic hardships and forgiveness of remaining repayments when a death occurs. In the case of a Federal PLUS Loan, further repayment can be ended should the borrower or the student die before the loan is paid off.

Alternative educational borrowing typically are basic consumer loans that require repayment as scheduled, no matter the economic situation of the borrower and in cases of death. Co-signers assume responsibility for the loan when conditions dictate.

Of course, with all loan borrowing, take the time to read and understand the fine print on the documents you sign.

General Comparisons Summary

To assist families consider options, basic items are compared between Federal Direct PLUS or Grad PLUS Loans and non-federal loan programs.

  Federal PLUS Loans Alternative
Education Loans
Interest Rate  Variable though fixed for the life of the loan with each borrowing
Often variable; rate may be influenced by credit history
Fees Charged at Time of Disbursement Low; set through federal regulation Variable; based on lender, loan type, and credit history
Loan Limit Flexible; up to cost of education minus other aid Flexible; up to cost of education minus other aid; some lenders or your credit history may impose further limits
Application Process One-time promissory note Re-application each year and with any mid-year increases
Credit Check Required; no debt-to-income review Required; minimum income and debt-to-income requirements in many cases
Repayment Flexible; based on federal regulations Limited to specified options of lender

Know Your Options & Costs

Borrowing money for college is a reality for most families today. But utilizing the federal aid programs to exhaustion and tapping into alternative loans rarely is the advice that financial aid offices and lenders would jointly give most families.

Take the time to look at the long-range and cost-effective ways to borrow within the family to meet costs that cannot otherwise be met. Researching options and exploring ways to manage debt within the family can be critical for both parents and students when covering the costs of going to school and preparing for the costs associated with loan repayment.

Of course, the best advise to all families and students is to live frugally while in school and reduce reliance on any loan borrowing when possible. Limiting any type of borrowing now will reduce repayment costs in the future.  

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student reading a book

The Federal PLUS Loan and some alternative educational loans offer interest-only repayment plans during enrollment periods.

Families should always explore options that can reduce the compounding of finance fees (interest charged on interest already accrued). Such payments can reduce the overall financial obligation with loan repayment.

Staff at One Stop can assist you in your decision process or refer you to another staff member for more information.