The long-awaited changes under the FAFSA Simplification Act will finally see the light of day in December…
College can be unaffordable for students who cannot secure other funding options. The Free Application for Federal Student Aid (FAFSA) determines a student’s eligibility to receive financial aid. However, the aid offered through the FAFSA application will not be enough to cover most students’ school expenses. Therefore, students must secure other funding sources such as scholarships, grants, and payment plans. Once all other funding options and sources are exhausted, parents can apply for additional loan funding. Parents can ch0ose to apply for a Parent PLUS or a private loan from Juno.
Federal or private?
There are many things to consider when determining which type of loan to borrow. Each have pros and cons that I listed below.
Both require a credit check; however, federal PLUS loans are easier to get than private loans because the credit requirements are different. Most private loans are credit-based. Their approval requires an established credit history, qualifying credit score, and possibly income. The Federal PLUS loan considers adverse credit history the predominant disqualifier, not your credit score or overall credit history. So those with “less than perfect” credit may need to consider Federal before private. However, Juno may be a better option for people with good credit because they can qualify for a loan with a lower interest rate than federal loans. Also, both can be reconsidered if initially denied if you reapply with a Co-signer.
Interest Rates and Fees:
Juno offers private loans that have variable interest rates. The interest rates on private loans vary because they are set by lenders who use their criteria to underwrite the loan. The interest rate you’re offered is based on your credit, credit history, and credit score. This means private loans are hard to get. What Determines Student Loan Interest Rates is a great article and provides more in-depth information on this topic. Federal student loan rates are set by Congress according to the Federal Student Aid Office and are based on 10-year Treasury notes, plus a fixed increase. Federal PLUS loans disbursed after 7/1/2022 will have a 7.54% fixed interest rate. Use the calculator on Juno’s website to compare your loan options: Juno Parent Plus Loan Calculator. Lastly, federal student loans have origination fees which are not typically offered on private loans.
Entitlements and Repayment Options
Federal PLUS loans are funded by the government and come with certain entitlements and benefits, including loan repayment, forgiveness, cancellation, and discharge options. Also, there are no prepayment penalty fees. These options vary for private loans and are determined by the lender. However, loan forgiveness and Income-Driven Repayment plans are not typically offered by private lenders. Repayment options are critical if you are suddenly unable to make your payment. Federal Student Aid provides a great side-by-side comparison that includes a summary of the differences between the two loan types: Federal v. Private Loans.
Consolidation v. Refinance
Federal PLUS loans can be consolidated. Consolidation combines all loans into a single loan with an interest rate based on a weighted average of all the consolidated loans. This is a repayment option that all federal borrowers have. Private loans are not eligible for consolidation; they offer loan refinance. Refinance is when you restructure an existing loan into a new one if you meet the eligibility requirements. This is a great way to lower the payment and interest rate; if you qualify. If you don’t, this won’t be an option for you. Although you can’t consolidate a private loan, you can refinance a federal loan. However, that is not something I recommend you do. This action is irreversible. Once you refinance a federal loan, it is turned into a private loan, and you lose certain entitlements (loan forgiveness, cancellation, discharge, etc.) offered only to federal borrowers. Is that a risk you want to take?
There are many things to consider when trying to determine which loan option is the best option for you. My advice: Choose wisely!