If you’re headed to college next fall for the first time or returning to school, you could just be realizing your financial aid package may not cover all of your expenses. That’s usually when borrowers start wondering about private parent student loans or the pros and cons of parent PLUS loans versus private loans.
The standard advice from college financial aid counselors is to round up all of the grants, scholarships, work-study and help from your family that you can before taking out any loans. And that’s good advice.
The other thing you’ll hear from financial aid counselors is that if you do need to borrow to fund your education, you should start with federal student loans. Also good advice — but keep in mind that there are several types of federal loans, and some are a better deal than others.
- Student loan limits
- Federal vs. private student loans
- PLUS loans
- Private student loans
- Compare rates from multiple lenders
Student loan limits
Before you decide on which type of loan to get, it’s good to know what the limits are on each type. With subsidized and unsubsidized direct loans, there are annual and lifetime limits, depending on your dependent status.
|Year||Dependent students||Independent students (or dependent students whose parents can’t obtain PLUS Loans)|
|First-year undergraduate annual loan limit||$5,500 ($3,500 in subsidized loans)||$9,500 ($3,500 of in subsidized loans)|
|Second-year undergraduate annual loan limit||$6,500 ($4,500 in subsidized loans)||$10,500 ($4,500 in subsidized loans)|
|Third-year and beyond undergraduate annual loan limit||$7,500 ($5,500 in subsidized loans)||$12,500 ($5,500 in subsidized loans)|
|Graduate or professional students annual loan limit||n/a||$20,500 (unsubsidized only)|
|Subsidized and unsubsidized aggregate loan limit||$31,000 ($23,000 in subsidized loans)||$57,500 for undergraduates ($23,000 in subsidized loans)
$138,500 for graduate or professional students ($65,500 in subsidized loans). Graduate aggregate limit includes all federal loans received for undergraduate study.
Once you move on to graduate school, you’re no longer eligible for direct subsidized loans, regardless of your financial need.
Federal vs. private student loans
Students with little income or credit history will typically need a cosigner to qualify for a private student loan. A cosigner can also help you get the best rate.
Cosigning a loan is no small responsibility — you are essentially asking your cosigner to take on all of your obligations to repay the loan if you cannot, sometimes without all the rights enjoyed by the borrower. The good news is, your cosigner won’t necessarily be taking on those obligations forever — many lenders will release the cosigner after the borrower has established a track record of making payments.
Graduate students and parents with any adverse credit history will need a cosigner — the government’s term is an “endorser” — to take out a PLUS loan.
When you take out a federal student loan, the interest rate is fixed for the life of the loan. Private student loans come in more flavors than government loans. Everyone who takes out the same type of government loan at the same time pays the same interest rate. Private student loans offer more options when it comes to rates and terms.
For students who need to cover additional expenses at either the undergraduate or graduate level, there are PLUS loans for parents and graduate students.
You can pretty much take out all of the PLUS loans you need to cover school attendance costs that exceed the other financial assistance and loans you’ve received. The catch is that you’ll pay a price.
Parent PLUS loans are the riskiest federal student loans, because not only do they carry the highest interest rates of all federal loans, they also offer the least flexible repayment options. Unlike private lenders, the federal government does not evaluate the borrower’s ability to repay student loans. For borrowers taking out PLUS loans, only a basic credit check is performed.
You won’t be turned down for a PLUS loan unless you have adverse credit history (such as bills that are more than 90 days overdue, or a bankruptcy or foreclosure). The flip side is that because your ability to repay is not evaluated, it’s easy for parents to get in over their heads with PLUS loans.
A recent analysis by the think tank New America concluded that by making parent PLUS loans to borrowers without evaluating their ability to repay, then pursuing those who default into bankruptcy court, garnishing their wages and social security checks, and seizing tax refunds, the government may be engaging in “predatory lending practices.”
Parent PLUS loans are offered by the federal government. So, before you turn to a PLUS loan, it’s worth comparing offers from private student lenders, who provide student loans to undergraduates, graduate students and parents that are priced competitively with federal PLUS loans.
Private student loans
With private student loans, the interest rate depends on the borrower or cosigner’s credit risk, and whether you’d rather have a fixed-rate or variable-rate loan.
Pick a variable-rate private student loan, and you’ll start out with a better interest rate than you’d get on a fixed-rate private loan with the same repayment term.
If you’d rather have the certainty of a fixed-rate student loan, most private lenders offer those, too. You’ll pass up the chance to start out making lower monthly payments but if interest rates go up, your monthly payments will remain unchanged.
Also keep in mind that private student loans don’t offer some of the borrower benefits packaged with most federal loans, like access to income-driven repayment (IDR) plans and the potential for loan forgiveness after 10, 20 or 25 years of payments.
Parents taking out PLUS loans are expected to start making payments as soon as their loan is disbursed. Parents may request a deferment while their child is enrolled at least half-time and for an additional six months after their child graduates leaves school, or drops below half-time enrollment.
There are four common repayment plans for private student loans, although not all lenders offer each of them:
- Immediate repayment (full monthly payments while still in school)
- Interest-only repayment (you pay only the interest on your loan while you’re still in school)
- Partial interest repayment (you make a flat monthly payment while still in school that only covers part of the interest you owe)
- Full deferment (you pay nothing while you’re enrolled in school, and your loan balance grows)
Many private lenders are adopting borrower-friendly features like grace periods and optional deferment. Just keep in mind that interest will accrue during these periods, just as it does on unsubsidized federal direct loans and PLUS loans.
Compare rates from multiple lenders
Since private lenders compete for your business, it’s wise to:
- Do your research and comparison shop. Remember that private lenders offer different types of loans on rates and terms that depend on the borrower — it can pay to shop multiple lenders before you commit to one. Credible’s online comparison tool lets you find the actual rates you could qualify for with multiple, vetted lenders, saving you time and effort.
- Keep an eye out for discounts. Many student lenders offer discounts to borrowers who agree to have payments automatically deducted, for example, so be sure to check for such offers.
- Boost your chances by applying with a cosigner. Getting the best interest rate on private student loans depends largely on credit history. As a student, it’s likely that you haven’t had enough time to establish your credit. But if you have a parent, legal guardian, friend, or employer who’s willing to help, you can ask them whether they’d be willing to cosign a loan for you.
The companies in the table below are Credible’s approved partner lenders. Whether you’re the borrower or cosigner, Credible makes it easy to compare rates from multiple private student loan providers without affecting your credit score.
|Lender||Fixed Rates From (APR)||Variable Rates From (APR)||Get Rates Through Credible|
Citizens Bank review
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|5.49% - 12.99%6||4.24% - 11.99%6||Get Rates
|5.49% - 11.85%9||4.25% - 11.35%9||Get Rates
Sallie Mae review
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Citizens Bank Student Loan Rate Disclosure
Variable rate, based on the one-month London Interbank Offered Rate ("LIBOR") published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of May 1, 2019, the one-month LIBOR rate is 2.48%. Variable interest rates range from 4.45%-12.42% (4.45%-12.32% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 5.25%-12.19% (5.25% - 12.09% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan.