<p>Son is going to an OOS school. We think with his scholarships, we can swing the full cost of this years tuition without relying on the Parent Plus Loan that is in his financial aid package. (We will be using both the sub and unsub Stafford loans) But, we want to make sure we have a little cushion available to cover tuition and fees during the 3rd quarter just in case. I have read many threads that advise parents to use the Parent Plus loans before taking out private loans. However, it appears to me that the interest rate on private loans, especially if we cosign a loan in son's name, are at a substantially lower interest rate. Why then are PP loans reccommended over private loans? </p>
<p>We have a very high credit rating, enough income to qualify for a loan and would start having payments on the loan (if we did tap into it) automatically deducted from our bank account each month (interest + principal) Does any of that make a difference? </p>
<p>What am I not getting? </p>
<p>On a related note, if we do "accept" the parent plus loan but don't use it, how does that affect one's credit? Does it show up on the credit report as an open line of credit? Can we decline it for the first two quarters and accept it for the third quarter?</p>
<p>Parents use a variety of loans to supplement financial aid packages. Some use Plus, some use private loans, some use HELOC. This is entirely up to you.</p>
<p>The bigger thing to consider…will you be able to continue to take out loans (will you qualify if you borrow again and again) for YEARS two, three and four. Some families find that they are able to borrow for year one, and even year two…but then they do NOT qualify for loans in years three and four. Plan ahead. College is four years (at least).</p>
<p>Schooner, it’s possible the threads you saw advised parents with bad credit to try for Plus loans…or advised students to ask their parents to apply before trying the private route with no cosigner. If your credit score is good and you have lower cost options, you should definitely pursue them. Other than a fixed rate, the only advantage I can see from a Plus loan is that it’s forgiven if the student/parent dies.</p>
<p>yes, we can continue to take out loans in subsequent years; that is not a problem. We’re not talking about that much money every year to bridge the gap. And the interest rates are so low, I am not sure I would want to dip into our cash or retirement contributions at this point. </p>
<p>I just can’t figure out why anyone would reccommend taking out a 6.8% loan when you can get one for 3.25%? </p>
<p>If I am understanding things right, it appears that the rates on private loans to students which are cosigned by parents are quite a bit lower than student loans secured only by the parents. is that right? If so, why? Is it because lenders are banking on the fact that the interest is going to be acruing for 3+ years?</p>
<p>Not everyone can qualify for low interest loans like that. If you have really bad credit, even having your parents cosign is no guarantee that you will get favorable interest rates like that. I think most of the recommendations about taking a Parent PLUS loan before a private loan are directed to people who don’t have recourse to lower-interest loans. Obviously, if you do have that recourse, then taking a Parent PLUS loan would be a bad idea. It’s not that confusing, if you think about it from that perspective.</p>
<p>If you can get a better rate than PLUS, take it. The reason a lot of folks don’t want to do this is because they cannot get an unsecured loan for education at a better rate. Many do not want to use HELOC because that is money to be used in case of an emergency. If you borrow all of that available, you are out of that option, whereas if you go through PLUS, you still have the HELOC or other credit line available for other purposes. PLUS is only available for the college so you do not have an open access to those loans. Also the PLUS process is much easier than getting an unsecured loan most of the time.</p>
<p>The other reason is that there are more choices on how to repay PLUS than with traditional loans.</p>
<p>I did some more looking into this this afternoon. Parents who have a credit score of 690 or above can qualify for the best private student loan rates which range from 2.875 to 4.375 at all the different sites I checked out. </p>
<p>I also looked up credit score statistics at a couple of different websites. Somewhere between 60% and 66% of the population has credit scores at or above 690. That means that for nearly 2/3 of the population, private student loans are going to be a better deal than the Parent Plus Loan. That is why I am wondering why the default advice here is that parent plus loans should always be the first resource after the Stafford Loans.</p>
<p>Schooner…those private loan rates you are quoting are VARIABLE rates pegged to short-term interest rates (currently extremely low) and are the BEST available with pristine credit…</p>
<p>Those loans typically end up averaging 10+% on average over time…check out the history of short-term interest rates and you’ll see what I mean…</p>
<p>BE WARY!! But if one understands those risks, then a private could be a better choice for some…</p>
<p>Don’t overlook the cheapest fixed rates available…a mortgage! But that’s another thread in itself!!</p>
<p>Schooner -
Last summer, several of us here were asking the exact same questions you are. In fact, one of the parents used almost the same words - she said “What am I missing?” She asked her daughter’s college FA office that very question, and they agreed that, for parents with very good to excellent credit scores, private loans may make more sense than the PLUS loan, with its high interest rate and huge origination/guarantor fees. The private loan with parent as cosigner also has the significant advantage that payment is not required until 6 months after graduation (it probably is best to at least pay the interest during that time, though) – that way you are paying on your EFC while the kid(s) is in school, then paying down the loans after graduation (which you should be able to do pretty rapidly since you’re no longer making tuition and room and board payments). With PLUS, you would be scraping up the money for your EFC and for loan payments simultaneously.</p>
<p>Here are the threads on which this discussion occurred last summer:</p>
<p>Rest assured interest rates will go up and let us say they go up to only 5.5%. Even at the minimum level you will paying an interest rate 3.4 + 5.5 = 8.9%. Not all will get it at 3.4%. Most will pay a starting rate of say 5 or 6% which may still be less than PLUS loans but when interest rates go up, it will be much higher than a PLUS loan you could have locked in. And if you keep the loan for 10 years, history suggests that in the 10 year period you will pay more with private student loans than what you would have paid in PLUS loans. If you have good credit and expect to pay off the loans in 2-4 years after graduation then Private loans may be good, else you are looking at the same risk that homeowners took when the went for ARM’s rather than a fixed interest rate. And, private student loans are not dis chargeable in case of bankruptcy or death of signer.</p>
<p>Remember private student loans are equivalent to ARM’s in the mortgage industry. Do you want to take the risk?</p>
<p>If you can get a good deal on a private loan, take it. The PLUS program makes it much easier for parents. You apply on line–it can take minutes, the approval comes back relatively quickly and the school is in synch with you. There are also many payment options with these loans that may not exist with private loans.</p>
<p>But if you can get a fixed rate loan that is a better deal. Take it. We borrowed from our 401K last year rather than going through PLUS because of the favorable interest rate we got. But we are also returning the loan faithfully on schedule over two years rather than stretching it out. Also, we now have that much less in our 401K to borrow if something comes up. If we don’t repay the loan on schedule, we run the risk of having an adverse tax event. Still, I wanted to go this route, because I budgeted repaying the amount over two years, in hopes that we won’t need another loan during that time, and could save on the interest and origination amounts. When this loan is paid off, we’ll have two in college, and I anticipate taking a huge PLUS that year which we will have to pay off over 10 years. But that one year loan for our son from last year will be out of the picture instead of having another PLUS added to the mix.</p>
<p>The other risk of borrowing against the 401k is if, God forbid, you lose your job you may have to repay it all immediately. (unless that has changed - it used to be the case).</p>
<p>The caveat here is “can you stand the risk?” If you intend to payback the loan in about 2-4 years, then the risk is mitigated. If you are going to need 10 years to repay it, then in my opinion the risk is considerable. If you can get a fixed rate loan, and it is better than PLUS and there are no pre-payment penalties, then it is worth grabbing. If not, you need to decide your risk tolerance. Evaluate these loans just the way you will evaluate a ARM.</p>
<p>Yes borrowing from a 401 (K) is risky and has a down side and is good short term source, never be used for borrowing money that will not be repaid rather quickly.</p>
<p>Yep, we knew that . We are more than half way through paying this one. It’ll be paid next year, and we’ll then take a hefty PLUS to defray the two kids in college. We may get some financial aid with two in college IF S2 goes to a school that meets most need, but then that means committing to an expensive private school for 4 years when we will likely only qualify for a little fin aid the year we have two in college. Maybe S1’s school will kick in a bit but I have a feeling that all we will get is subsidization of the Staffords. I only come up with about $10K of need with two kids, and that’s if the younger one goes to a $50K+ college which is unaffordable to us even with that aid, and we are taking into account using Staffords as it is. If it weren’t for the fact that we have yet another due for college 4years after this next one, I would have him take a gap year to avoid this overlap. But doing that just extends the problem and we are not getting any younger. Sigh. But 401K will be paid back, and PLUS for the first kid’s first year will be paid that year we have two in college. Too bad for us that fin aid apps do not take into consideration payments towards college loans.</p>