Taking out student loans to go to college gets expensive really fast, but if you’re borrowing to help someone else get an education, the costs can be much greater. Not only do interest rates on parent student loans tend to be higher than those student borrowers receive, parent borrowers generally have to start making payments immediately (students often don’t have to pay while they’re in school), and there may be no return on your investment — you’re paying for someone else to improve their earning potential, not yours.
Still, parents all over the country put themselves deep into student loan debt to help their children go to college. The federal loan program for parents is the Direct Parent PLUS loan, which is available to parents of dependent undergraduate students enrolled at least half-time in college, as long as they fill out the Free Application for Federal Student Aid (FAFSA), meet the government’s general eligibility requirements for federal aid and do not have an adverse credit history.
Parent PLUS loans aren’t the only option. There are many private lenders who will allow parents to borrow for their child’s education, and student loan behemoth Sallie Mae just announced a new program for parent borrowers. Here’s how it compares to the federal Parent PLUS loan.
Federal Direct Parent PLUS Loan: 4.272% origination fee, for loans disbursed on or after Oct. 1, 2015, and before Oct. 1, 2016.
Sallie Mae Parent Loan: No origination fee.
PLUS: 6.84% fixed rate, for loans first disbursed on or after July 1, 2015, and before July 1, 2016.
Sallie Mae: Variable APRs range from 4% to 10.37%, and fixed rates range from 5.74% to 12.87%.
PLUS: Parent PLUS borrowers have the options of standard repayment (a fixed payment amount over a 10-year term), a graduated repayment plan (payments start lower and increase every two years for up to 10 years) or an extended repayment term of up to 25 years. Borrowers may also be able to pause their payments through deferment or forbearance, if they qualify.
Sallie Mae: There are two options, and the first one is like the standard repayment option offered through the government. Parents also have the option of making monthly interest-only payments for 48 months (four years) while students are enrolled in school, followed by 10 years of monthly payments on the principal and interest.
PLUS: Parent borrowers must have a dependent student enrolled at least half-time in an undergraduate degree program to qualify for these federal loans. The student and the borrower must also meet the government’s basic eligibility requirements.
Sallie Mae: The parent loan actually isn’t limited to parents. The news release on the program says that “any creditworthy individual who wants to help fund a student’s college education” can take out one of these loans. The student benefitting from the loan can be a graduate or undergraduate student and can be enrolled for less than half-time.
Even Sallie Mae’s website says it’s most economical to consider federal student loans before private loans, largely because they offer the borrower more flexibility in repayment.
But if you have great credit, meaning you may have a good chance to qualify for that 5.74% fixed-rate APR from Sallie Mae, the private loan could help you save a lot of money when compared to the current 6.84% fixed-rate APR for PLUS loans. The lack of an origination fee helps, too, but borrowers who can’t qualify for the lowest APRs may find the new Sallie Mae loan more expensive overall.
Deciding how to pay for college takes a lot of time and thoughtful consideration of how the loans will impact the borrowers’ futures. It can be a really tricky process to navigate, so take the time to research your options. Remember that your credit score can significantly impact those options, so if you know you may need to help a student pay for college in the near future, it’s a good idea to see where you stand and make a plan for repairing your credit, if necessary. You can keep tabs on that by getting your free credit report summary every 30 days on Credit.com.
More on Student Loans:
- How Student Loans Can Impact Your Credit
- Can You Get Your Student Loans Forgiven?
- A Credit Guide for College Graduates