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.

Calculating Student Loan Interest

Your student loans accrue interest every day. The only exception to this is that Stafford subsidized loans do not accrue interest while you are on a deferment. For example, when you are on an in-school deferment any subsidized fund you have will not have any interest accruing.

Unsubsidized, PLUS and GradPLUS loans will all accrue daily interest at all times. At the end of any deferment or forbearance if this interest is not paid, the interest will become part of your principal balance.

If you want to know your daily interest, here's a simple formula to calculate it:

Principal balance x interest rate / 365.

That's your principal balance multiplied by your interest rate and divided by the number of days in the year. Viola! Your daily interest.

As your principal balance lowers, your daily interest will also lower. This is why there is no prepayment penalty on these loans - if you pay off your entire balance plus the amount of interest that you've accrued as of that day, you will not pay another dime for that loan.

Now to define some terms!

You will know which loans are "subsidized" and "unsubsidized" by your financial aid awards package. They designate these totals on the package for you. You can also call up the servicing agent and ask.

You can also call or check your account online for the amount of interest due. If at all possible, make payments toward your interest while on a deferment or forbearance. It can save you thousands in the long run.

Deferments and forbearances are ways to pause your payments. If you are ever struggling to make payments on your account, call your servicing agent immediately! Chances are they CAN lower or pause your payments. You will spare yourself the hassle of delinquency and could even avoid default. Honestly, defaulting on student loans takes effort! Call as soon as you have a problem and you can avoid all of the pain.

Why Loanfaqs.org?

Clearly this is not a .org site, so where did the name come from?

Over a year ago I tried to create a student loan forum where people could come and post their questions online for me to answer. I called it Loanfaqs.org, got a logo created, even got the forum up and running. But unfortunately it just never got popular. Student loan advice isn't really something you can sit and discuss in forum threads because it is a one-question one-answer format.

So now I've decided to try a blog format. I think this will help in that it's easily searched for specific information. I've kept the name just for the thrill of having something with that name still floating around the internet. I hope to help the same amount of people with advice and resources that I've been able to help elsewhere.

No question is "stupid" in this business. The process is long, confusing and complicated. Never be shy to ask a question or post a comment! I'm here to help or at least get you pointed in the right direction.

Medical Students: Minimizing the Debt

If you are a medical student then you are subject to much higher loan limits than other students. This includes nurses, doctors, veterinarians, etc. So if you know you're looking at anywhere from $75,000.00 to $250,000.00 in debt, what can you do to?

First of all, get a job while in school. I know this will be difficult for many of you but it will pay off in the long wrong. Why get a job (beyond living expenses, of course)? To make payments toward your interest. Every chance you get, make a payment toward your loans. It will hurt in the short run but help you by leaps and bounds in the long run. If you manage to pay over the interest owed you'll start lowering your principal balance, which will then decrease the interest you're paying.

Now you've graduated and gotten through your residency. Now what? First, check into forgiveness programs through the Department of Education. Direct also has an early write-off policy. The write-off wouldn't happen for a long while but if you know it's coming, it can make the wait bearable.

Some states have assistance programs for nurses and doctors. Try to find one! And most importantly, some hospitals will help you pay down your loan debt. Get a job with one of these.

Remember, you can't help how much you have to take out, but you have some control over how much you have to pay back. Never miss a chance to pay down your interest or principal balance. It will save you in the long run!