Comparing the Parent PLUS Loan to Alternative Student Loans

Parent PLUS Loans are one of many ways to pay for college

Parent PLUS Loans are available to any qualifying parent of a dependent college student, but not every parent who applies for one is going to see an approval letter come through the mail. In fact, sometimes a Parent PLUS Loan is more difficult to acquire than college acceptance, and it leaves parents wondering if they will be able to help their kids pay for college. There’s some debate as to this type of college loan; many financial experts believe that parents should not take out a Parent PLUS Loan to help their kids pay for college as it then forever indebts them to their kids – and causes years of financial worry and stress. There are others that believe this is a great idea because no one wants their kids to have to pay for college by racking up thousands of dollars in debt before they’re even old enough to understand what that truly means for their financial future.

If you’re eligible and approved for a Parent PLUS Loan for your students, good for you. If you are not, however, you don’t need to worry too much. There are alternative loan options that are available to parents who want to send their kids to college so that they can better their lives and work hard toward building a solid financial foundation for their own adult lives. Before we delve into alternative loan options for parents and their students, we will discuss the Parent PLUS Loan, what it is and how you get one – and what to do if you are not approved for this loan.

The Parent PLUS Loan is one that is offered to anyone with a dependent student going into college, in college or going back to school for their continuing education. However, it’s not always that simple to get this loan issued to you, it’s not always financially savvy to take on a loan like this, and it’s not always the best option. Additionally, it’s not something that you might qualify for.

Many families mistakenly believe that they are not eligible to receive any help paying the cost of tuition if they are denied a Parent PLUS Loan, but this is not always the case. In many instances, your student is perfectly capable of receiving financial aid in other aspects of their college career. While some might assume that the Parent PLUS Loan is the best way to send a kid to college, we tend to disagree. We’ve compared the Parent PLUS Loan to some of the biggest and most well-known alternatives for financial assistance for college students, and what we’ve discovered is that the Parent PLUS Loan comes with its fair share of benefits, but it’s not always the best option.

So, if you are denied a Parent PLUS Loan and you are in need of an alternative way to meet the cost of college expenses, we have a few ideas that might be more affordable, more beneficial and much easier to obtain. Don’t discount the alternatives as ‘second-rate’ or ‘desperate measures,’ either. These are perfectly acceptable methods with which to pay for college, and that’s something worth considering. Do the math, compare the alternatives and see which one is best for you, your student and your financial need.

What is a Parent PLUS Loan?

A Parent PLUS Loan is, put simply, a federal loan offered to any parent with kids in college. The loans are federally backed and funded, and they have a relatively low interest rate of only a little over 6%, which is why so many people hope to qualify for this particular loan. The lender of all Parent PLUS Loans is the U.S. Department of Education, and no parent qualifies for this type of loan without stellar credit, which immediately narrows down the potential pool of borrowers.

What you qualify for is dependent on your student and his or her financial need. The U.S. Department of Education works to determine eligibility and loan limits based on the cost of an education through the school in which the student is enrolled. The Department then takes the other financial grants and aid that the student was issued, subtracts that from the cost of his or her education and provides parents with the remainder of the cost of a college education so that classes, books and other requirements are paid for. It helps you send your child to school without worrying every semester how you will pay for classes and books.

Applying for a Parent PLUS Loan is not that difficult at first. As you do with any other federal student loan or government grant for college students, you and your student must fill out the FAFSA (Free Application for Federal Student Aid) which does not take too long provided you have your financial information on hand at the moment. You’ll need to provide your personal information as well as a copy of your most recently filed income tax return to file the FAFSA, which can be done completely online. From there, you will find out whether or not the school in which your child is enrolled requires that you file for the Parent PLUS Loan through StudentLoans.gov or if you can do it at the school’s financial aid offices and then you will go from there.

The downfall for many parents applying for a Parent PLUS Loan for their child’s college tuition is that there is a credit check required. If you can find someone to endorse you, which is very much like a co-signer, this might not matter. Additionally, you can request that the U.S. Department of Education grants you a letter of satisfaction based on extenuating circumstances that explain your poor credit history. It does not always work for many borrowers, but it’s a chance to see if you can actually qualify for the Parent PLUS Loan.

Repayment on a Parent PLUS Loan varies greatly. Most Parent PLUS Loans do not enter repayment until the loan is completely disbursed to a borrower. However, if your child is a grad student or a professional student, the loan repayment period is deferred until 6 months post-graduation so long as your child remains at least a part-time student throughout his or her road to graduation. Even then, you have other repayment options for the Parent PLUS Loan. Most Parent PLUS Loans work with a standard 10-year repayment plan, but many are offered an extended payment plan that is determined based on your financial status. There are also income-based financial repayments that increase as your earnings increase.

The Downside of Parent PLUS Loans

Sending your kids to college is important, but is it worth the cost of your financial future? It might sound like a $25,000 loan for a year is more than manageable, but it requires a longer look. You might assume that this is about half the cost of a new car, and you get to pay this balance down over a longer period of time, right? Depending on where your child decides to go to school, you’re looking at whatever yearly tuition is multiplied by at least four – assuming graduate school is not something your child wants to pursue. Now you have to multiply our $25,000 per year example by four years and you have a total cost of $100,000 in loans to repay for your child at some point. That’s a small investment property that you get nothing out of.

Now ask yourself this question; how many kids do you have that will go to college, and how close together? I’ll use myself as an example. I have four kids (including twins). My three pregnancies resulted in babies three years apart every time. At some point, I will have a child in college for three years and then her sister will go into college during her senior year. When she graduates, I’ll have one college student for two years, and then my twins will enter college and I’ll have three college students. Now let’s assume that they each go to the same college and it costs them each $25,000 per year. That’s $400,000 in college tuition my husband and I will pay and eventually wind up repaying at the same time.

To give you a slightly different perspective, let’s go into the repayment of any potential Parent PLUS Loans my husband and I accrue here in this particular example. The current rate is 6.84%, and let’s say we do take out $400,000 in Parent PLUS Loans so we can send our four kids to college. When we are repaying all four loans at the same time, our monthly payment would total $4,611.42 for a grand total of 10 years.

Now do you see why it might not be the best idea to take out a loan like this? Even if the colleges our kids attend cost half the price per year, we’re still looking at paying $2,300+ in repayments for a decade. It’s a lot of money; and it’s not necessarily in your best interest to use this method to pay for the cost of a college education for your children. However, some families find that the Parent PLUS Loan is a great idea for their family. They have fewer children, the cost of tuition is low where their kids will attend school and they are able to secure scholarships and grants that cover a portion of tuition; then a Parent PLUS Loan is far less expensive.

So what happens if you are denied a Parent PLUS Loan? Your hope of sending your kids to college is not dashed by this denied application. You just have to find an alternative method to paying for college for your kids, and we can help you do just that.

Using Financial Aid Responsibly

Before we inundate your day with a long list of alternative payment options for college tuition for those denied a Parent PLUS Loan, we want to take some time to make sure that all of our parent and student reader are using the money they receive for college the correct way. It’s imperative to realize that not all financial aid is to be used for whatever you feel the need to pay for, but for very specific purposes. Financial aid is meant to cover the cost of tuition, books, and other expenses that are directly related to the cost of your college education.

We have compiled a list of tips that will help you make the most of your financial aid before you receive it and after it is in your pocket.

  1. File Early – The earlier you file, the better off you will be when it comes to your FAFSA. The reason is that many grants and other funding options available to students with exceptional financial need are only available in limited amounts and are awarded on a first come, first serve basis. You want to be among the first, so apply early.
  2. File Regardless – Many students and their parents are worried that they will not qualify for financial aid at all if they are not approved for a Parent PLUS Loan, but this is not the case. In fact, many students are surprised to see that they do qualify for loans, aid and grants in other forms when they fill out the FAFSA. You never know what will happen, but it doesn’t hurt to try.
  3. Make no Mistakes – This should go without saying, but we have to bring it up. Do not make any mistakes, miss any information or knowingly misrepresent yourself on the FAFSA. If you make mistakes, you will have to wait longer for your application for financial aid to be approved, which means you might miss out on some great opportunities. Additionally, if you misrepresent yourself by trying to make your income look smaller or by trying to claim dependents that are not yours, you will be in legal trouble. Lying on a college financial aid application can be punishable by a fine of $20,000, jail time and even forfeiture of funds that you have already received.
  4. Only Take What you Need – This is probably the most important piece of information a student will ever hear in regards to student loans and aid. As a student, you want to be sure that you have enough money to cover the cost of your education after being denied a Parent PLUS Loan, but you also want to be responsible. Many students make the mistake of taking all the money that is offered to them even if they don’t need it, and that can result in exceptional financial hardship. For example, if the cost of a college education for your student is only $8,000 per year and your student is awarded $16,000 per year, only accept the $8k that is required to pay for college. Accepting the rest can incur a load of fees, accrued interest and so much more than will ruin your – or your child’s – credit later in life. Excess funds are not for a new car, spring break or to pay your debts or living expenses while you’re going to college.

Unsubsidized Student Loans

When a family is denied a Parent PLUS Loan, they do have the option of applying for unsubsidized loans from the federal government. Much like the Parent PLUS Loans require, borrowers will need to file a FAFSA (which you’ve already done if you have been denied a Parent PLUS Loan). Unlike a student who is considered an independent student and does not use their parents to help with their loans and are only able to borrow as much as $31,000, families denied a Parent PLUS Loan are eligible to borrow up to $57,500 over the course of a college education.

The interest rate on a loan like this changes annually, but it is capped at 8.25% for all students – it will never exceed this amount. Also like the Parent PLUS Loan, the unsubsidized loans accrue interest from the moment it is disbursed. The requirements for approval are far less demanding than a Parent PLUS Loan, however, and that is what makes this particular loan more appealing and much more attainable for many families. To qualify for an unsubsidized loan, a student must be a full-time student and must never have defaulted on any other loans in the past. Your loan goes into repayment six months after you graduate from college or when you drop out.

There is one consideration that must be made when considering a federal education loan like this; they cannot be cancelled. If ever you fall into bankruptcy and you cannot repay the terms of your loan, you will find that you are unable to have this debt erased with bankruptcy. It is with you for life, and it will require that you repay it. The only people who are forgiven are those who show such dire circumstances that the federal government has no choice but to allow families to forgo repayment based on their terms.

Subsidized Student Loans

Another alternative to the Parent PLUS Loan is a subsidized student loan. This is one that is issued only to those showing financial need but if that is part of the reason you were denied a Parent PLUS Loan, this might be the loan for you. These loans are based on financial need, and the federal government covers the cost of interest while a student is enrolled in a financial institution at least part-time. Like the sister unsubsidized student loans, this type of loan does not require repayment until the student is either a graduate of college or a drop-out, and repayment does not begin for six months following graduation.

Interest rates vary, and they change every year. However, if you look at the rates offered this year, you will find that they are significantly lower than the current Parent PLUS Loan rates. Parent PLUS Loan rates are currently 6.84% while the subsidized federal Stafford loan rate is only 4.29% at the moment. There is a drawback to any student that is enrolled in a graduate program, and that is that you are not eligible to receive any subsidized student loans.

Applying for this type of loan is very simple. When you applied for the Parent PLUS Loan, you filled out a FAFSA. All students that file the FAFSA are considered for this loan based on financial need. When your financial aid information is completely reviewed, your child’s college will contact you with the information that it received from FAFSA, including any eligible amounts that your child qualified for in this category. This is a financial aid package that is awarded each year, unlike a Parent PLUS Loan. While a Parent PLUS Loan is issued on a full-term basis and then disbursed gradually over the length of your child’s education, this is one that has to be re-applied for on an annual basis, which means that you will find it very simple to obtain.

Because you were already denied a Parent PLUS Loan, you are eligible to receive more benefits this way, in conjunction with any available unsubsidized student loans. Over the course of your four-year degree, you will be able to receive as much as $57,500 in Stafford loans. As much as $23,000 of this can be subsidized, which saves you significantly on interest while you are in school and then again when it comes to repaying your student loans.

This is a loan that can be accepted in full or lowered so that you don’t take more than you need, which only puts you further into debt. These loans can be used for tuition, for living expenses and for books; they are also good for buying the supplies you need to get through your classes, such as those expensive calculators used for many mathematical and technical classes, as well as a computer on which to do your work.

Private Student Loans

Many lenders are happy to issue students a loan with which to pay their college tuition, but the rates, the amounts the ability to qualify really do take a toll on many students, particularly those who have already been denied a Parent PLUS Loan. Almost any major financial institution is happy to issue a student loan to anyone who is a student with good credit, or a co-signer for anyone without good credit. If you are a parent who was denied a Parent PLUS Loan, this might be the alternative you need to help your student pay for college. While the loan is technically in the name of your student, you can help your student repay the money due if you so choose. It’s a personal decision that is up to you and your student, but it’s something that you might have to consider.

To apply for a private student loan you must meet the following requirements:

  1. Have good credit or a co-signer
  2. Have a job
  3. Show proof of income
  4. Show proof of enrollment
  5. Be enrolled on at least a half-time basis

Depending on where you get your private student loan, you will pay competitive interest rates and you can use your loan to pay for the cost of anything that has to do with school, from books to tuition to living expenses. Additionally, private student loans all come with a very wide array of repayment options. From immediate repayment that allows you to begin repaying the balance due as soon as you are given the loan you need to a deferred repayment plan that allows you to wait to pay until you are a graduated or even to an interest-only repayment that is higher now than it will be in the future. You get to choose, and that is an option many Parent PLUS Loan denied families look for in a private student loan.

Loan limits are subject to the information found on your credit report or the report of your co-signer. However, one thing that the private loan sector offers than other student loan options do not offer is the chance to apply for very specific education-based student loans. For example, if you take a quick look at Discover’s website, you will find that the bank offers their student applicants the ability to apply for private student loans that are for specific purposes; undergrad loans, MBA loans, law school loans, and even medical residency loans. All of which are loans that are needed by many students throughout the course of their long continued education.

Federal Perkins Loans

Another alternative to the Parent PLUS Loan when you are denied is a Federal Perkins Loan. Unfortunately, this program is not offered at every college or university in the country, so you will want to check on this one to see if it’s a possibility for you. The Federal Perkins Loan is a great alternative because it’s automatically something you are put into consideration for when you submit your FAFSA, which you did when you applied for that denied Parent PLUS Loan. When you show exceptional financial need, you are granted an award provided your school works with the program and has the additional funding to provide to you.

The way that this type of loan works is through a fixed interst rate, which is currently 5%. The school you attend is your lender, and you make your payments to your school throughout the life of your loan. Loan requirements include being enrolled at least half-time, showing exceptional financial need and that your college participates in this particular program. As a student in the undergraduate program, you are eligible to receive a maximum loan of $27,500. Grad and professional students can borrow up to $60,000 per year.

No repayments are required until you are a graduate. Even then, your loan does not enter the repayment period until nine months after graduation. If you fall below half-time or you drop out, however, you will be required to begin paying back your Federal Perkins Loan right away, just as you would with the Parent PLUS Loan you were already denied.

Grants and Scholarships

There is a misconception that it’s too hard to get these, that they’re not for much money and that they are a waste of time when, in fact, these are two of the best ways to pay for college. What we love about grants and scholarships is that they do not have to be paid back, and they are available everywhere. Sure, it might take a little additional effort to find a grant or scholarship in your area, but they are always available.

Grants and scholarships for college students come in all shapes and sizes, and sometimes your differences are what make you the most likely to be issued one or more. For example, there is free money that never has to be paid back available for young mothers, for women, for men, for students of every single ethnic or religious background, for those who excel at a specific subject, etc.

Scholarships and grants are free money, and the financial aid office at your college will have plenty of information about very specific grants and scholarships that might be available for students in your school. Additionally, the internet is a great resource. Some grants, such as the PELL Grant, are automatically awarded to students with exceptional financial need when they file their FAFSA at the beginning of each school year.

University Payment Plans

There is a little known secret in the world of college, and that is that many students are eligible to create a repayment plan for their tuition and books with the college’s financial aid office. If a student does not qualify for financial aid or has to pay all or some of his or her tuition in cash, many schools are willing to work with families to create an affordable repayment plan that allows students to continue their education while they repay the cost of classes and tuition.

Many families denied a Parent PLUS Loan are left with the issue of paying for college. Perhaps your loans, grants and scholarships still leave you with a gap that has to be paid. If this is the case, your best bet is to call the school and discuss a tuition installment plan or tuition payment plan. While the rules differ at every college, most colleges allow their students and parents to repay tuition using a monthly installment plan for approximately 10 months. This allows parents to break down the cost of tuition month-by-month to make it more affordable when it’s time to pay for a new year.

Of course, this is an alternative that works better for those who have a gap rather than the entire amount of tuition to cover. Let’s say that your student is eligible to receive an unsubsidized loan of $5000 per year after you are denied a Parent PLUS Loan, she receives $4000 per year in grants and she has a scholarship that amounts to $5000 per year. If we go with the example that tuition is $25,000 per year, she has $14,000 of her yearly tuition paid for. Now you are responsible for the remaining $11,000. Break that down into equal payments for a 10-month period and you’re looking at a much more affordable $1,100 per month versus $2,500 per month without any other financial assistance.

Before you commit to something like this after being denied a Parent PLUS Loan, talk to the financial department at your child’s university. There are sometimes fees associated with this type of payment plan, which might make them more expensive. Some fees might include a one-time upfront fee, others might include something more substantial, such as interest. Furthermore, most universities that allow parents and students the opportunity to use a payment plan do require that parents pay a penalty if payments fall behind – and that can be quite costly.

Credit Card Payment

When you are desperate to find a way to pay for your child’s education and you have already been denied a Parent PLUS Loan, you might consider paying the cost of your child’s tuition with your credit card. We do not love this idea; we don’t believe in revolving credit card balances, but sometimes you have to do what you have to do. This is a post about the many different alternatives to Parent PLUS Loans, and this is an alternative, after all.

If you do plan on using your credit card to pay the cost of tuition for your student, we have some very important advice we want you to consider. For one, make sure that the card you are using has a low interest rate. Now is now the time to use a high-interest credit card for this kind of purchase. Additionally, a new card with an introductory 0% APR for a year is a great alternative to the card you have now. This allows you to finance the cost of a year’s education without incurring any expensive interest charges, and it also allows you to pay a little less every month while you pay off that tuition the first year.

Additionally, we would recommend that if you’re planning on using your credit card after you are denied a Parent PLUS Loan, you use one with great rewards. When you are able to earn rewards such as cash back with your purchases, you’re earning a little something for your efforts. We like this idea, because it makes the cost of a college education seem to pay you back just a little bit over the course of your life.

Each of these alternatives to the Parent PLUS Loan are beneficial in their own way, have their own drawbacks, and their own terms. It’s our recommendation that you spend some time comparing the ones that seem the most intriguing to you before you apply for anything. Additionally, it’s always a good idea after being denied a Parent PLUS Loan to check with your child’s college or university to find out what other forms of financial assistance your student might have qualified for that you are unaware of before you make any acceptance decisions.

This is a long-term financial commitment, and it is in your best interest to make sure you know as much about the form of assistance you are using and what it will really cost you over the life of the loan the life of your student’s college career.

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