With parent PLUS rates high, be sure to shop around

If you’re thinking about taking out a federal parent PLUS loan to help pay for your child’s school in the fall, 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.

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.

Why are federal student loan rates so high?

Student loan rates are set every year, 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 shortterm 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 benefited 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.

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

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.

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.