Charles Langston:As federal parent PLUS loan interest rate soars, why it may be time to go private

If you’re thinking about taking out a federal parent PLUS loan to help pay for your child’s school in the fall,Charles Langston you might want to think again, student loan experts said.

Families often use federal parent PLUS loans to fill funding gaps left after all student federal aid, grants and scholarships have been exhausted. In the last three months of 2023, 3.8 million parents borrowed $112.2 billion in PLUS loans, Department of Education data showed. For 2024-25, those loans will be extremely expensive at a more than three-decade high 9.08% interest rate, plus fees.

“It’s worth taking a look at how private loan options compare for the remainder of your education financing needs, particularly if you are considering taking out…PLUS loans,” said Brian Walsh, head of advice and planning at online bank SoFi.

How much can you save with a private loan?

In some cases, a private loan could save you tens of thousands of dollars over the life of a 10-year loan, student loan experts said.

Learn more: Best personal loans

Thomas Graf, executive director at not-for-profit state lender Massachusetts Educational Financing Authority (MEFA), gives a comparison using last year’s rates for a 10-year $18,000 loan:

◾ A parent PLUS loan at the 2023-24 rate of 8.05% would mean a $228 monthly payment, or $27,423 for the life of the loan.

◾ A MEFA loan at 6.47% means monthly payments of $204, or $24,493 total.

“You would have saved 10.7% over the life of the loan,” he said, and that’s not including the PLUS loan’s origination, or service, fee. Origination fees are subtracted from your disbursement, but you still pay interest on them. Last year, the fee was 4.228% of the loan.

Because of the origination fee, you may also have to borrow $18,000 plus the fee to actually get $18,000, Graf said.

“When considering private versus federal PLUS loans, it is important to consider the cost of the origination fee in addition to interest rates,” Walsh said. “Even if federal rates are lower than private, sometimes with the addition of the origination fee, it will still cost you more over time.

Why are federal student loan rates so high?

Student loan rates are set yearly, based on the last 10-year Treasury auction in May.

The 10-year Treasury yield has trended higher over the past few years as inflation rose and the Federal Reserve aggressively increased its short-term, benchmark Fed funds rate to combat it. Both high inflation and higher short-term rates generally push up 10-year yields.

What’s the downside to a private student loan?

◾ The most oft-cited downsides include losing access to forgiveness and lower payments from an income-driven repayment plan.

However, experts are quick to note that federal parent PLUS loans haven’t benefitted much from either of those offerings. Some parents have even resigned themselves to dying with that debt. Private student loans can be transferred to a child to repay, but federal parent PLUS loans cannot.

◾ A private student loan may not get discharged in case of death or disability. Those are up to your lender. Private student loans can have more flexible terms and payment schedules, but you must ask and understand what they are.

◾ Not everyone qualifies for a lower rate or even a private loan. “Private loan rates are dependent on the borrower’s credit profile and ability to repay, whereas federal loans are not,” Walsh said.

Should families skip all federal student loans then?

No.

You should always take subsidized, or needs-based, federal loans if you qualify.

“If you’re eligible for a subsidized loan, this means that you are only responsible for interest that accrues after graduating,” Walsh said. “It’s generally recommended to max out the amount of subsidized loans first before considering other loan types even with these higher interest rates.”

When you start looking at unsubsidized loans, shop around. Non-needs-based loans “charge you an interest rate from the moment you take the loan out, even while you’re still in school,” he said.

Looking for the best:Best private student loans of May 2024

Where should you shop for a private student loan?

Most large commercial banks like Chase, Bank of America and Wells Fargo have exited the student loan business, but other companies like SoFi and College Ave offer them now, said Stacey MacPhetres, senior director of education finance at EdAssist by Bright Horizons, known for its early education centers.

Also, “pay attention to looking at credit unions and state-run educational loan programs because they tend to have very, very attractive terms,” she said.

Not every state offers student loans, and some may be limited to residents or schools in that specific state, but some like MEFA lend nationwide. You can find a list of them here.

“Think of it the same way as a mortgage,” MacPhetres said. “Do your rate shopping, and apply for a few of those, recognizing if you do so in a short window, say two weeks’ time, it’s only one hit on your credit report. Compare the offers and choose one.”  

Too many people simply take the parent PLUS loan because the “school says I could take a PLUS loan,” she said.  “A little extra education could benefit a lot of people.”

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.