Federal or Private Parent Student Loans? What you should know

Sending your child to college is exciting. Figuring out how to pay for it is, well, not exciting.

That’s because there’s likely to be stress caused by a cost gap and figuring out how to bridge it with student loans. By now, you’ve probably had the conversation about who will pay for college — you or your child. Are you taking out a loan for your child to cover some of or the entire gap? If so, you have plenty of options to choose from.

Start by deciding between a federal or private student loan. Here’s an explanation of both options.

With the Federal Direct PLUS Loan program, you can take out a loan for the benefit of your child’s education. The maximum amount you can borrow is the cost of attendance minus any other financial aid received.

Federal Direct PLUS Loans charge an origination fee, which is a percentage of the amount borrowed (typically between 1% and 6%) and covers the lender’s costs of processing the loan or agreement. So if you’re paying for your child’s tuition bill of $10,000, then you’ll want to request $10,000, plus the amount needed to cover the origination fee.

Repayment typically begins 30-60 days after the full amount of the loan is paid out to the school. If your child is enrolled at least half-time, then you may request to defer payments until six months after your child ceases to be enrolled. But remember, interest will still accrue during the deferment period, increasing the total cost of the loan.

Federal Direct PLUS Loans have a fixed interest rate, which is set by Congress. That means your interest rate won’t change for the life of the loan.

The standard repayment length is 10 years, and repayment options include:

1. Standard repayment: Payments are a fixed amount over a 10-year period.
2. Graduated repayment: Payments start lower and then gradually increase over time, usually every two years, for a 10-year period.
3. Extended repayment: These payments can be fixed or graduated over a 25-year period.

Some private lenders offer loan options for parents who want to borrow on their child’s behalf, similar to a PLUS loan.

Unlike PLUS loans, some private lenders waive the origination fees.

Furthermore, private lenders determine their interest rates based on the borrower’s creditworthiness. So in some cases, the interest rates for a private parent student loan can be lower than that of a PLUS loan.

The particulars of private student loans vary by lender, but many offer loans with either fixed or variable interest rates. Unlike a fixed rate, a variable interest rate can change over the life of the loan. While this variable rate may initially be lower than that of a PLUS loan, it may increase over the life of the loan. Private lenders also tend to offer higher maximum loan amounts to qualified borrowers, but research each prospective lender to make sure they can cover your loan needs.

Repayment options may also vary by lender, but generally speaking, private student loans offer these three choices:

1. Interest-only payments: Payments are made, only on the interest, while the student is enrolled in school at least half-time and for the six months after leaving school. After this period, full principal and interest payments begin.
2. Immediate repayment: Full principal and interest payments begin about 60 days after funds are disbursed.
3. Full deferment: No payments are made while the student is enrolled in school at least half-time and for the six months after graduation. After this period, full principal and interest payments begin.

Regardless of the option, interest will continue to accrue until the loan is paid off.

Sending your child to college is exciting and even a little bittersweet, as they prepare to move onto the next phase of their life. However, college is an expensive investment — choosing the right lending option is crucial to ensure you get the best interest rate and terms to better manage the repayment process.

Take the time to review all the options to find what works best for you. Then you can turn your attention back to the fun stuff — like graduation parties and getting them prepared for move-in day.

 Citizens is here to help you navigate your student lending options for today and the future. Make sure to visit our Student Lending page — we’re on chat.