August 7, 2007

Choose PLUS over private

Posted in Parent PLUS Loans, Private Loans, The Financial Aid Process at 10:10 AM by Joe From Boston

Here’s a great article on why you should choose a PLUS loan over a private loan. Read the article at the San Francisco Chronicle.

Shopping around for loans

Kathleen Pender Sunday, August 5, 2007

Because August is the month when students and their families are scrambling to get college loans before school starts, I decided to answer this question from Pat H., which raises issues every borrower should know.

“I plan to be the co-signer on a student loan for my nephew starting college in South Carolina,” Pat writes. “He has Stafford loans and Pell grants, but needs money for rent, food, gas, health insurance, etc. I have been checking Web sites for private student loans and the best interest rate I have found is 8.5 percent. All rates are variable. His mother does not have the credit history necessary to get a loan, so I will be the co-signer and use my credit. I believe we will need about $10,000 for the coming school year. Do you have any tips on finding a good loan?”

Before getting a private loan, Pat’s nephew should first take out the maximum he can in federally guaranteed college loans. These include Stafford loans for students and Plus loans for parents and graduate students. These loans have lower rates and fees than private loans.

Unlike private loans, Plus loans are not dependent on the borrower’s credit score, but parents do have to pass a credit check. A parent with an “adverse credit history” (including a bankruptcy in the past five years) can be denied a Plus loan. When that happens, there are two other options for getting federal loans, says Mark Kantrowitz, publisher of

Pat’s nephew should contact his college financial aid office. If his mother has been turned down for a Plus loan, he could be eligible for an additional unsubsidized Stafford loan, on top of his original Stafford loan.

The additional loan is $4,000 per year for freshman and sophomore years and $5,000 per year thereafter.

Even if his mother has not applied for a Plus loan, the nephew might be able to convince the financial aid office that she would not qualify, without the mother needing to apply.

Another option when a parent is turned down for a Plus loan is to get another relative who can pass the credit check to endorse a Plus loan and promise to repay it if the parent can’t.

Pat’s nephew should pursue the first option first because the maximum interest rate on a Stafford loan is only 6.8 percent compared with 7.9 or 8.5 percent (depending on school) on a Plus loan. Fees are also lower on Stafford loans.

If the nephew can’t get the additional Stafford loan or it isn’t enough to meet his needs, Pat should consider endorsing a Plus loan. The annual limit on a Plus loan is equal to the cost of attendance (including tuition, room, board, books and other costs) minus any other financial aid the student receives. This could eliminate the need for a private loan.

Shopping for federal loans: Students who attend a college that participates in the government’s direct lending program usually must get their Stafford and Plus loans from the U.S. Department of Education.

Students at schools that participate in the Federal Family Education Loan program can get their Stafford and Plus loans from any bank or other private-sector lender that offers them.

The government sets the maximum interest rate and fees that lenders can charge, but some offer discounts so it pays to shop around.

Most schools offer a list of preferred lenders, which is a good place to start but not end.

New York Attorney General Andrew Cuomo’s office found that many schools were receiving incentives to put lenders on those lists, creating potential conflicts of interest.

Although those incentives are disappearing, students also should consider lenders not on those lists.

Many lenders require students to jump through hoops to get discounts, such as signing up for direct debit or making 36 or 48 months of consecutive on-time payments. Very few recent college grads never miss a payment.

That’s why Kantrowitz says borrowers should focus on discounts that are impossible to lose. He says My Rich Uncle and Northstar/Total Higher Education are two lenders that offer discounts with no strings.

To learn more about discounts and find lists of discounts offered by many lenders, go to

This page also links to a new loan discount analyzer that lets you compare fee and rate discounts from various lenders to see which is the cheapest overall. “It’s a complicated calculator,” Kantrowitz admits, but it’s the only one of its kind.

Some states, including Maine, Massachusetts, New Hampshire and Texas, have attractive loan programs for students who are either from that state or going to school in that state. If the state offers such a plan, it will probably be on the school’s preferred lender list.

A number of Web sites have sprung up that let students shop for loans from various lenders. Most of these sites, including and, get referral fees or are owned by participating lenders.

Finaid, which does not market loans, is sponsored by Citibank.

Private loans: When parents can’t take out Plus loans or choose not to – perhaps because they don’t want to be on the hook – students usually turn to private loans.

This is expensive because lenders base their interest rates on the borrower’s credit score. The lower the score, the higher the rate. Most students have very low scores because they have no credit history.

Students can lower their interest rate by getting a co-signer with a higher credit score. The co-singer becomes legally obligated for the loan.

Lenders advertise their lowest rate, but “you usually have to have a FICO score above 800” to get that rate, Kantrowitz says. Less than 10 percent of borrowers get the lowest rate, while “about three-quarters get the worst rate,” he adds.

Today, rates on private student loans typically range from around 8.25 percent to 18 percent or more. All rates are variable and pegged to the prime or Libor benchmark rates.

Fees are also based on the borrower’s credit score and range from zero to 11 percent of the loan amount, Kantrowitz says.

Borrowers can’t find out what rate and fees they will get until they apply for a loan.

Every loan application, however, knocks up to 5 points off your FICO score, Kantrowitz says.

“Most lenders have five or six credit tiers between their best and worst scores. If you apply for too many loans, it could pop you down into the next credit tier” and cost you even more, he adds.

On his Web site, Kantrowitz lists about 35 lenders and their range of rates for private student loans. Go to

Picking the lender with the lowest advertised rate can backfire. “The lenders with the lowest best rate often also have the highest worst rate,” Kantrowitz says.

What usually works best is picking a lender whose rate is among the lowest and has a narrow spread between its highest and lowest rates, he adds.

If everything else is the same, it’s usually better to choose a loan pegged to Libor than prime, he says.