Attending college is an expensive endeavor that many families can't afford and yet, nonetheless, expect to experience. A degree from a four-year university is still the brass ring for many American families. It's easy to see why – from life changing experiences to career assistance, there are many benefits to going to college. Unfortunately, those benefits come at a cost.
The major drawback of a college education can be summed up in one word – debt. With in-state public colleges averaging over $24,000 per year, families are left fighting each other or drowning in a sea of information to find the best remaining option that won't result in so much debt.
Parent PLUS Loans can be a great option to access funds when traditional student loans are not enough to cover college expenses, but they can also be expensive. Consider the following about Parent PLUS Loans and their alternatives before making a college funding decision.
Why You May Want to Take Out A Parent PLUS Loan
There are many ways to pay for a college education from saving on your own to student loans and scholarships. Parent PLUS Loans offer an added layer to the college funding process. A Parent PLUS Loan lets parents borrow money to help a child pay for college.
These are typically taken out when the traditional methods of savings, loans and scholarship monies do not cover the entire cost to go to college. As the loans are sent directly to the school, they can be quite convenient for families in need.
There is one small problem, however, with Parent PLUS Loans – they can be quite expensive. Parent PLUS Loans currently charge an interest rate of 6.84 percent. Add to that high rate the risk of delaying retirement saving or long-term investing and Parent PLUS Loans can become less than desirable in certain circumstances.
Less Expensive Parent PLUS Loan Alternatives
Those looking for Parent PLUS Loan alternatives will find they have several options to consider. The main options are as follows:
- Taking out a personal loan
- Getting a home equity loan
- Consolidating them, in the future, into other student loans taken out by your child
As with anything financial in nature, each alternative is going to have its own risks and rewards. As a parent, you want to mitigate the impact of debt on your child, but you also want to protect your personal financial security. After all, if you sacrifice your future financial stability to give your child a chance at increased earning ability, they may end up spending that extra money on you during your retirement years, mitigating the entire college funding effort in the first place.
Seeking a less expensive way to help a child pay for college that doesn't put your own retirement saving goals in jeopardy is an attractive choice.
With that in mind, it's important to view Parent PLUS Loan alternatives in light of interest rates. Below you will find a historical chart, over the past 10 years, showing interest rates on student loans, Parent PLUS Loans, personal loans and home equity loans.
As you can tell, there are other alternatives to Parent PLUS Loans to consider that cost less in the long run. Each option has different benefits and drawbacks to consider, so it pays to do your due diligence before making a decision. You can use LendingTree to research the best personal loan rates and home equity rates to find the most suitable loan possible.
"Before committing to one type of loan, I always recommend that parents explore all of their options," says Joseph DePaulo CEO of College Ave Student Loans. This includes not only looking at your current financial situation but also looking at your long-term needs as you consider retirement planning.
What to Do if You Have an Expensive Parent PLUS Loan
It is possible, though not always easy, to get out from under an expensive Parent PLUS Loan. It's also important to remember you don't have as many alternatives as traditional student loans provide. "Most of the federal repayment and forgiveness benefits that apply to loans made to students don't apply to Parent PLUS Loans, and they may be harder to take advantage of," adds DePaulo.
With that in mind, however, there are alternatives to lower your pricey Parent PLUS Loan payment. You can refinance a Parent PLUS Loan in certain circumstances. PLUS Loans can be consolidated through programs provided by the federal government or refinanced through a private lender. Keep in mind that you will give up certain protections through refinancing but it is a possibility.
The small differences in interest rates between a home equity or personal loan may seem insignificant to what you may be paying on your PLUS Loan, but over the life of the loan, that small difference can add up to thousands of dollars in savings. That reality should be kept in mind when looking at your longer-term retirement planning needs.
Just remember that if you choose a home equity or personal loan, to pay them off as soon as possible and consider the risk with each option. Balance those against potential tax deductibility savings from PLUS Loan payments to see which is best for you.
There are several alternatives to Parent PLUS Loans to consider. Each has their own set of risks and rewards. Do your due diligence to see which fits your need better before making a decision.