Federal PLUS Loans vs. Alternative Student Loans

Many students and parents face the same dilemma once they run out of free money, like scholarships and grants, and Federal Stafford Loan funds: where are we going to come up with more money to pay for school?

Today, there are two options to consider if you have a gap between your financial aid and what you need to pay for school.

1. Parents and graduate students can use the Federal PLUS Loan
2. Undergraduate and graduate students can take out an alternative student loan, generally with a parent or relative as a co-signer

So what’s the difference between Federal PLUS Loans and alternative student loans? Well, Federal PLUS Loans are available through the federal government but only parents and graduate students are eligible for them. If you are a parent, the PLUS loan will be in your name and you will be fully responsible for making sure it gets paid back, not your child. The interest rate on PLUS Loans is fixed at 7.9%, and there is an origination fee of 4%. Remember, you want to maximize Stafford Loan funds before taking out a PLUS Loan.

By far the most popular use of alternative student loans is to assist in paying for undergraduate education expenses. Some parents do not want to incur education debt in their name through the PLUS Loan Program, and would prefer that their child be primarily responsible for their student loans. Undergraduate students have limited funds available from the Stafford Loan Program, where graduate students are eligible for increased amounts.

Alternative student loans are credit-based loans made by private lenders, like a bank or other student loan provider, not the government. An alternative student loan is made in the student’s name, but generally requires the help of an alternative student loan co-signer if the student has little or no income and credit history. Interest rates and fees on alternative student loans vary by lender, and are based on your credit history (and that of your co-signer if applicable). Often, a borrower or co-signer with excellent credit can obtain an interest rate and origination fee below that of the Federal PLUS Loan in today’s low interest rate environment, especially if you are willing to shop around. Just remember that interest rates on alternative loans are generally variable, so they can adjust up and down through the life of the loan.

For more information, check out the following sections on AlternativeLoanZone.com:

You can also learn more about paying for college, private student loans and access college calculators from our other helpful websites.