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If you’re headed to college next fall for the first time or returning to school, it may only now be dawning that 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 vs 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. That’s good advice.

According to latest numbers from The Institute for College Access and Success (TICAS), seven out of 10 graduates of public and nonprofit colleges in the class of 2015 had student loan debt, with an average of $30,100 in loans.

The fact is, only about one in five families are able to foot more than half of the bill for their child’s education, and most expect their children will have to rely on student loans for funding.

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.

As we explored in Part 1 of this series, the federal loans that deliver the most bang for the buck are direct subsidized loans. Rates on direct subsidized loans made to undergraduates after July 1, 2017 will be 4.45 percent. Not only is that a relatively affordable, fixed rate, but interest on subsidized loans doesn’t start accruing until your grace period expires, six months after you leave school.

But direct subsidized loans are only available to students who can demonstrate financial need. As we detailed in Part 2, direct unsubsidized loans to undergraduates carry the same low rate as subsidized loans, but interest starts piling up as soon as you take the loan out — while you’re still in school, in other words. There’s no break on interest during your grace period, and if you need a deferment or forbearance, you’ll still be on the hook for interest.

Another issue with subsidized and unsubsidized direct loans are the annual and lifetime limits. If you’re a dependent of your parents, the limit for direct loans in your freshman year is $5,500, and no more than $3,500 of that can be in subsidized loans. The aggregate, or lifetime limit for dependent undergraduate students is $31,000, of which only $23,000 can be subsidized loans.

YearDependent StudentsIndependent students (and dependent students whose parents can’t obtain PLUS Loans)
First-year undergraduate annual loan limit$5,500 (maximum of $3,500 in subsidized loans)$9,500 (maximum of $3,500 of in subsidized loans)
Second-year undergraduate annual loan limit$6,500 (maximum of $4,500 in subsidized loans)$10,500 (maximum of $4,500 in subsidized loans)
Third-year and beyond undergraduate annual loan limit$7,500 (maximum of $5,500 in subsidized loans)$12,500 (maximum of $5,500 in subsidized loans)
Graduate or professional students annual loan limitNot applicable (grad students are considered independent)$20,500 (unsubsidized only)
Subsidized and unsubsidized aggregate loan limit$31,000 (maximum of $23,000 in subsidized loans)$57,500 for undergraduates (maximum of $23,000 in subsidized loans)
$138,500 for graduate or professional students (maximum of $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. Rates on direct unsubsidized loans for graduate students are significantly higher — they’ll be 6.00 percent for new loans issued after July 1, 2017. The aggregate borrowing limit for federal direct subsidized and unsubsidized loans for graduate and professional students is $138,500.

What is a PLUS loan and should you get one?

For students who need to cover additional expenses at either the undergraduate or graduate level, there’s another type of government loan to be aware of — 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.

Interest rate on PLUS loans for students headed to school this fall are going up — rates on PLUS issued from July 1, 2017 through June 30, 2018 will be 7.0 percent. On top of that, PLUS loans carry a costly 4.3 percent up-front disbursement fee, which has the same effect as adding a full percentage point to the annual percentage rate (APR). Depending on the repayment plan you chose, the APR on PLUS loans will be around 8 percent.

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.

Is a Parent PLUS loan a private loan?

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.

LenderRatesLoan TermKey Details 
citizen bank
Citizens Bank
Fixed: 4.99%+
Variable: 3.74%+
5, 10, and 15-year loans• Borrow up to $170k
• Broad list of eligible schools
• Discount up to 0.5%
college ave
College Ave
Fixed: 5.24%+
Variable: 3.22%+
8, 10, 12, and 15-year loans• Borrow up to 100% of your school's cost of attendance
• Multiple repayment options
• Auto pay discount of 0.25%
iHelp
iHELP
Variable: 3.63%+20-year loan only• Borrow up to $150k
• Limited school eligibility
• 0.30% discount for qualified borrowers
rhode island student loan authority
RISLA
Fixed: 3.99%+10 and 15-year loans• Only available to Rhode Island residents and students
• Autopay discount of 0.25%
• Loan forgiveness for eligible interns
iHelp
Sallie Mae
Fixed: 5.74%+
Variable: 3.00%+
5-15 years• Broad school eligibility
• Borrow up to 100% of your school's cost of attendance
• Graduated repayment period

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 (for more on the topic, see “How adding a cosigner can help you get a better loan“).

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.

What is a private student loan?

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 (for more on this topic, see “What every borrower should know about variable-rate student loans“).

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.

IDR plans can help graduates with modest earnings pay off big loan balances. But they aren’t the best solution for everyone — stretching out your payments over a longer period will in many cases increase the total amount repaid. If you do qualify for loan forgiveness, you may face a large tax bill.

Parents who take out PLUS loans don’t qualify for most IDR plans. Their only option for income-driven repayment is to combine PLUS loans in a federal Direct Consolidation Loan and then repay the new consolidation loan under an Income Contingent Repayment (ICR) plan, the least generous of all plans. Under ICR, monthly payments are the lesser of:

  • 20 percent of discretionary income (compared to 10 or 15 percent under most other popular plans)
  • What the borrower would pay on a 12-year term

ICR provides loan forgiveness after 25 years, compared to 20 years for undergraduate student loan debt in other plans.

One lender competing through the Credible marketplace, the Rhode Island Student Loan Authority (RISLA), offers income-based repayment on loans to students and parents to borrowers who can demonstrate financial hardship. Monthly payments will not exceed 15 percent of the discretionary income of the borrower and co-borrower, and loan forgiveness is granted after 25 years.

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 (for more on this topic, see “What are my repayment options for private student loans?“).
Not sure which student loan to pick? Credible let’s you easily compare the best student. Compare now →

Check rates with multiple lenders before committing

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.

Ariha Setalvad <ariha@credible.com> is a Credible staff writer. Follow us on Twitter at @Credible.