Alternatives to Direct PLUS Loans

For parents

As a parent, you may wonder if borrowing for your student's education is best done through Direct PLUS Loans, or if you should pursue other avenues. The following are just some of the differences you'll find between private industry loans and Direct PLUS Loans.

Home equity or private/personal loans

• Collateral typically is required
• Eligibility most likely is based on a full credit check
• Interest rate typically is fixed and/or higher than that of a Direct PLUS Loan
• Closing costs may be high
• Tax deduction benefits may be available on home equity loans, but generally are not on private/personal loans
• Little or no options for payment postponement (such as deferment or forbearance) if you have problems repaying

Alternative/private student loans

Some students are opting to borrow alternative/private student loans instead of asking their parents to borrow Direct PLUS Loans. Students can use alternative/private student loans to cover the remaining cost of education after receiving all other forms of available financial aid.

The characteristics of these loans are usually very different from Direct Student Loans:

• Loans are credit-based, and a student may not have enough credit of his or her own, requiring him or her to have a co-signer
• Interest rate typically is based on the student's credit rating, so it may be high
• Origination fees may vary, but typically are higher than those of federal student loans
• Most have flexible repayment plans; however, postponement options are limited
• Some, but not all, alternative loans offer grace periods
• No interest subsidy is available on any of the alternative loans, so the student is responsible for repaying all interest, including interest that accrues while he or she is attending school
• Can't consolidate these loans into a Direct Consolidation Loan