If you’ve exhausted scholarships, grants, and Federal Direct Loans to cover college costs and are still left with funding gaps, you might be considering Federal Direct PLUS or private student loans. There are some key differences between the two loan types that are important to understand.

What to Know About PLUS Loans

First, let’s go over some details about PLUS loans. Federal Direct PLUS loans are available to graduate or professional students and to parents of dependent undergraduate students. These loans have fixed interest rates and offer flexible repayment plans, making them a popular choice for many families. However, they do come with some downsides, such as origination fees and credit requirements. If you have an adverse credit history, you may still be able to receive a PLUS loan if you meet additional requirements.

• One type of Federal Direct PLUS loan is the Parent PLUS loan, which is available to parents of dependent undergraduate students. These loans can be used to cover the cost of education, including tuition, room and board, and other related expenses. Parent PLUS loans have a fixed interest rate, which is set by the federal government each year, and they also come with an origination fee.
• Graduate PLUS loans are another type of Federal Direct PLUS loan, which are available to graduate or professional students who need to borrow additional funds beyond their subsidized and unsubsidized loans. Like Parent PLUS loans, Graduate PLUS loans have a fixed interest rate and an origination fee.

Now, let’s compare PLUS and private loans.

Who is the lender for each type of loan?

A lender is the entity that funds your loan – in other words, from whom you are borrowing and who you will need to repay.

• Federal Direct PLUS loans are issued by the U.S. government – the government utilizes various servicers to handle billing and other aspects of the loans.
• Private student loans are issued by credit unions, banks, and other finance companies, who may service the loans themselves or use another party for servicing.

Who is the borrower? (Whose name is on the loan?)

When you take out any type of loan, you are borrowing money that will have to be repaid. The borrower is the person legally responsible for repaying the loan.

• PLUS loans are issued to the parent of an undergraduate student (or to a graduate/professional student).
• Private student loans are issued in the student’s name but may require a co-borrower such as a parent to qualify or receive a lower interest rate.

What are the repayment terms?

Once your loan enters repayment (usually once you have graduated or otherwise separated from school), you will have a certain amount of time to repay the loan in monthly installments.

• Federal PLUS loans are eligible for the following repayment plans:
  • Standard Repayment Plan (10 years)
  • Graduated Repayment Plan (10 years)
  • Extended Repayment Plan (25 years but must meet certain criteria)
• Private loan terms vary by lender but often have options for longer repayment terms. For example, a Student Choice line of credit has a repayment term of 20 or 25 years based on the loan balance.

Which Student Loan Option is Best for Me?

Deciding whether a Parent PLUS loan or private student loan is better depends on your circumstances and financial situation. Both options have their advantages and drawbacks, and it’s important to carefully compare the terms and conditions of each loan before making a decision.

When comparing Parent PLUS loans and private student loans, it’s important to consider key factors such as interest rates, fees, repayment terms, and eligibility requirements. If you have a good credit history and can qualify for a lower interest rate on a private student loan, it may be a better option for you. However, there are protections and benefits of federal loans that could be beneficial in some circumstances, so in that regard a Parent PLUS loan may be the better choice.

Advantages Of Using A PLUS Student Loan

There can be many advantages to using a PLUS student loan to finance education expenses, including:

1. Access to federal benefits and protections: PLUS loans are federal loans and offer certain benefits and protections, such as income-driven repayment plans, loan forgiveness programs, and deferment or forbearance options. These benefits can provide a safety net for borrowers who may face financial difficulties or have trouble repaying their loans.
2. Fixed interest rates: PLUS loans have fixed interest rates, which means that the interest rate on the loan will not change over time. This can provide stability and predictability when it comes to budgeting for loan payments.
3. No co-borrower requirement: PLUS loans do not require a co-borrower, which means that borrowers can apply for the loan on their own without needing another individual to co-sign the loan.

Advantages Of Using A Private Student Loan

Some of the advantages of using a private student loan to finance your education include:

1. More flexible repayment options: Private student loans may offer more flexible repayment options than federal student loans, allowing you to choose a repayment term that works best for your budget and financial goals. Some lenders may also offer flexible repayment options such as interest-only payments or deferment options.
2. In many cases, lower interest rates: Depending on your creditworthiness and other factors, you may be able to secure a lower interest rate on a private student loan than you would with a federal student loan. This could potentially save you money over the life of the loan.
3. No origination fees: Some private student loan lenders do not charge origination fees, which can save you money compared to federal student loans that charge an origination fee.

Ultimately, the best loan for you will depend on your circumstances and financial goals. It’s important to carefully research and compare your options before making a decision. Borrowers should consider their financial situation and ability to repay the loan, as well as any potential benefits or drawbacks of borrowing from a particular lender.

For a side-by-side comparison of these loan types, check out our helpful chart or contact our College Counselor, who provides free, one on one advice about planning and paying for college. You can also consult studentaid.gov to learn more about federal student loans.

* Subject to annual review and credit qualification. Must meet the school’s Satisfactory Academic Progress (SAP) requirements.