Paying for college simplified

In a perfect world, a family’s college costs would be covered completely by their savings and “free” financial aid such as scholarships and grants. However, the rising costs of higher education, along with countless other daily necessities, has made this scenario an unlikely one for most families. Credit unions have an opportunity to help guide their members through the increasingly complex college financing process, which begins with understanding the basics of student loans.

Federal vs. private loans

Federal student loans typically come with benefits not available from other types of loans such as income-driven repayment plans, loan forgiveness programs, and deferment or forbearance options. For Direct Subsidized Loans, the U.S. Department of Education even pays the interest while the student is attending school and during a grace or deferment period.

Therefore, students should consider Federal Direct Subsidized & Unsubsidized Loans first after exhausting any savings, scholarships, grants, and work-study offers. Federal student loans are typically offered within the award letter from each college and are based on information submitted in the Free Application for Federal Student Aid (FAFSA).

Unfortunately, Federal Direct Loans may not be enough to fill funding gaps. This is when members should carefully compare their options and evaluate private loans vs. Federal Direct PLUS loans, which are available to graduate or professional students and to parents of dependent undergraduate students.

Federal Direct PLUS vs. private loans

Parent and Graduate PLUS 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. Since PLUS rates are indexed to the yield on the 10-year treasury note, they are likely to be very expensive this year with rates likely to be set between 8% and 9%. Throw in the 4.228% origination fee charged on PLUS loans and it’s clear that credit unions have an opportunity to provide members with a better deal.

Private loans are made by private organizations such as credit unions, banks, and state-based or state-affiliated organizations, and have terms and conditions that are set by the lender. Because offerings will vary, it’s important for members to review the rates, terms, and conditions before applying for a private student loan.

It’s also vital to emphasize to members – especially students who may not have borrowed previously – that when they take out any type of loan, they are borrowing money that will have to be repaid. 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.

When comparing PLUS loans and private student loans, it’s important to consider key factors such as interest rates, fees, repayment terms, and eligibility requirements. If members 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 them. 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.

Learn more about all the various types of federal student loans that may be available here: https://studentaid.gov/understand-aid/types/loans

CU Student Choice’s private education line of credit features zero origination fees and affordable rates set by each credit union partner. It also allows students and families to establish their line at any time – even if they’re unsure of their final amount needed or the school they’ll be attending – and then return later to complete the process. This flexibility is unique and could prove critically important to families this academic year.

Contact us to learn more about how CU Student Choice can make it simple to offer customized student lending solutions that benefit your current and future members.