Developing a plan to pay for college is a daunting task. The differences between the various student loan choices can be confusing. Two regularly considered choices are private student loans and Parent Plus Loans.
Before comparing these two loan options Jim Holt and Steve Wynne of Student Choice suggest that all students do the following:
Look at your family’s financial situation to determine how much of your savings can go towards paying for a portion of your estimated college expenses.
Then research and apply for free money such as scholarships and grants that you will not have to pay back.
Choose a college that is right for you but one you believe you can reasonably afford.
Complete the FAFSA and
Utilize as much free money (federal work study, scholarships, grants, etc.) as possible, then as much cheap money (Federal Direct Student Loans) as needed before applying for private loans.
Utilize your college’s payment plan program and pay as much as you can interest free each month.
The Federal Stafford Loan
The Federal Director Stafford loan is available to undergraduate students. Stafford loans have a fixed rate which is established for the upcoming year every June. Repayment of the starts 6 months after the student leaves school as long as the student is enrolled at least half-time.
The Types of Stafford Loans
Subsidized Stafford Loans – Subsidized Stafford Loans are need based, and the government makes the interest payments while students are enrolled at least half-time. The interest begins to accrue immediately upon graduation or when the student’s enrollment drops below half-time.
Unsubsidized Stafford Loans – Unsubsidized Stafford Loans are not need based. All students are offered $2000 in Unsubsidized Stafford loans for the academic year. Students can choose to pay the interest will in school or have the interest added to the loan principal.
The interest rate on both types of loans is currently 3.86% and has an origination fee of 1.051%.
Private Student Loans
Private student loans are made by institutions like banks and credit unions and even some credit card companies live Discover™. Private loans are based on factors like credit score and other factors. Students without a good credit history will usually need a cosigner. Most private loans also have a minimum monthly income requirement. The loan terms can be up to 25 years and can also be used to pay past due balances on other student loans. Most private loans defer payment until after graduation and offer considerations for less than full time employment. Private loans are also beneficial for students attended college on a less than half-time basis.
The Cons of Private Loans: The variable APR of most private student loans can make a substantial difference in the cost of the loan. Most are tied to the Prime or Libor rate and can adjust every month or every year. Some private loans also have no maximum percentage rate, so reading the terms and conditions is important. The interest rate of private student loans is usually higher that a Stafford loan.