PLUS Loans or Private Loans

Let me start by saying that a graduate or professional student should always take out a GradPLUS loan to cover any unsatisfied financial need. If you can't take out the GradPLUS on your own then you can have a cosigner. Please only consider private loans an absolute last resort in case of emergency!

But what about an undergrad student? Unfortunately there's nothing comparable to a GradPLUS loan available to you guys. Let's say you've gotten all your awards in grants, scholarships, and/or Stafford loans. Now you have additional financial need that you can't receive by any of those means. Here's your two loan choices broken down:

PLUS Loans

A PLUS loan is a credit-based loan taken out in the student's name. This loan can only be taken out by one of your parents or one of your legal guardians and you have to be considered a dependent.

How do you know if you're a dependent or independent by FAFSA standards? If you satisfy one of the following criteria, you are considered independent and cannot qualify for a PLUS loan:

- you're 24 years old by the end of the school (aka award) year
- you have legal dependents
- you are an orphan or ward of the court
- you are a veteran of the US armed forces
- you are a graduate or professional student

The parent will need to call in and apply for the PLUS loan, and because this loan is in their name no one but that parent may call in about the account to request any information. The PLUS loan cannot be transferred to the student's name, nor will it appear on the student's credit. A parent can consolidate the PLUS loans they take out together, but they can't consolidate their loans with the student's federal loans.

The interest rate is fixed at 8.5%. While the student is in school the PLUS loan can be deferred (just like Stafford loans in the student's name), and PLUS loans also now have a 6 month grace period after the student has graduated. The downside to all of this is that the interest continues to build while the loan is deferred. If that interest isn't paid by the end of the grace period, it will become part of the principal balance. This is why lenders recommend paying the interest as often as possible.

Private Loans

Private loans can be taken out in the student's name or in both the student and the parent's name. For undergraduates it's common to have a cosigner. In the event of a cosigner the loan is based on the cosigner's credit, not the student's. The loan will appear on the student's credit, though.

Interest rates range across the spectrum and are variable. You might have to make payments toward your interest while in school. Private loans have a finite amount of deferment/forbearance time, meaning that you will not have as much time available to stop payments in case of need or emergency. They are far less forgiving in repayment and harder to consolidate. You cannot consolidate private loans with any type of federal loan, but you can consolidate them with other private loans.

Which is better?

Some students have no choice here. Parents may refuse to take out a PLUS loan or there may not be parents available to do so. Private loans have strict criteria which limits who may receive one.

The basic rule of thumb is, federal before private. Exhaust all federal options available to you before turning to a private loan. Any lender worth their salt will tell you (and sometimes beg you) to take out a PLUS instead of a private loan.