PLUS Loans vs. Alternative Loans vs. Home Equity Loans
How does a Direct PLUS loan compare with a home equity loan? Is it more financially beneficial to borrow a Direct PLUS loan than a private alternative loan? Review the comparisons below of three types of financing options: Direct PLUS loans, private alternative loans, and home equity loans. You may see that what you thought was the best option may not be the best for you and your family.
Federal Direct PLUS Loan
Current interest rate: Fixed (review current interest rate)
Borrower: One parent is the only signer
Does loan affect student debt: Does not affect student debt
Fees: Approximate 4% origination fee
Cancellation: Loan is canceled if parent or student dies; also if parent becomes permanently disabled
Forbearance options: Payment postponements available for unemployment and financial hardship reasons; while student is enrolled parent may request postponement of payments
Payment flexibility: Standard, graduated, and extended repayment options are available
Repayment terms: Standard plan is 10 years; 25 years if loans total over $30,000; if loan is consolidated (refinanced) loan terms extend from 12 to 30 years depending on amount consolidated
Qualifying: Based on credit history; debt-to-income ratio is not considered; may be currently unemployed to borrow
Application: Easy on-line application process at StudentAid.gov.
Private Alternative Loan
Current interest rate: Fixed or Variable; usually without cap; variable rates may change monthly to quarterly; if variable, margin over index may be based on the credit of co-signer; look for the lowest possible margin over the index
Borrower: Student is primary borrower; parent co-signs loan and bears equal responsibility for loan repayment
Does loan affect student debt: Will affect student debt; be careful not to borrow more than $5,000 per year to keep student's debt down to a minimum
Fees: Some do not charge fees; others may charge disbursement and origination fees
Cancellation: Some private lenders will cancel loan if student borrower dies
Forbearance options: Payment postponements vary from lender to lender
Payment flexibility: Repayment options vary from lender to lender
Repayment terms: Length of term may vary depending on amount borrowed
Qualifying: Varies by lender; most are based on credit history; debt-to-income ratio of co-signer is often considered
Application: Via phone, paper, or online; may need to supply additional documentation.
Home Equity Loan
Current interest rate: Variable or fixed; variable may be capped at 18%; based on Prime Rate or another consumer index
Borrower: Parent or home owner
Does loan affect student debt: Will not affect student debt
Fees: Varies, but may include home appraisal fee, application fee, origination fee, points, closing costs, and annual fees; prepayment penalty may apply
Cancellation: No cancellation provision if parent or student dies
Forbearance options: Usually unavailable
Payment flexibility: Payment amount is fixed
Repayment terms:10-30 years
Qualifying: Many factors including credit history, home appraisal, title review, and proof of property insurance
Application: Can be easy and fast if done online; may need to provide additional documentation.
NOTE: If you borrow a home equity loan for education purposes, you run the risk of there not being enough equity to borrow a home equity loan in the future for home improvement or other expenses.