PLUS vs. Alternative Student Loans

What is a PLUS Loan?
The Federal PLUS Loan is designed for parents of dependent undergraduate students. The parent must first go through a pre-approval process to determine if the parent shows creditworthiness. Lenders do not look at the parent’s debt-toincome ratio. Parents who are approved can borrow up to the full cost of the student’s education minus all other financial aid. Parents, who are U.S. citizens or permanent resident aliens, may take out a PLUS Loan if the student is:

• An undergraduate, dependent student
• A U.S. citizen or permanent resident alien
• Enrolled in an eligible program and school
• Attending school at least half-time
• Making satisfactory progress
• Under 24 years of age

PLUS Loan Terms

• Fixed interest rate of 8.5%
• Parents are responsible for repayment
• No debt-to-income ratio requirement
• May borrow up to the total Cost of Education minus financial aid received
• Deferment and forbearance privileges available
• Federally insured against death and disability
• Eligible for a Federal Consolidation Loan
• Repayment begins during enrollment (parents can check with lender for deferment option)
• Parents without positive credit history who want to take out a PLUS Loan, may obtain a cosigner (also called an endorser) with positive credit history
  • An endorser does not have to be a family member
  • The endorser is responsible for repaying the PLUS Loan if the parent is not able to repay the debt

What is an alternative student loan?
Beyond the Federal Stafford Loan, students may apply for additional loan money through alternative student loans. Alternative student loans are private loans offered by banks, savings and loan institutions, or non-profit agencies that are specifically targeted to address educational costs. Many lenders require that an undergraduate student with
a limited positive credit history, have a cosigner for this type of loan.

Alternative Loan Terms

• Variable interest rates (no interest rate cap)
• Student or cosigner may be responsible for repayment
• Credit approval process is more comprehensive (may look at debt-to-income)
• May borrow up to the Cost of Education minus financial aid received
• Limited deferment and forbearance options
• Not federally insured against death and disability
• Not eligible for the Federal Consolidation Loan program (may consolidate through private programs)
• In-school deferment options vary by lender

If the student is denied an alternative loan based on the cosigner’s credit, the student can reapply with a different cosigner. In addition, students should manage their credit very carefully.

If a student’s credit has been damaged, very few lenders will loan more money, even if the cosigner has good credit.