At this time of year, this is the scenario many families are facing. They have filed for financial aid, reviewed the financial aid package, made the deposit, and now are looking at some sort of gap that needs to be filled. The amount will vary family to family, but the available payment options remain the same. These are options we recommend once the maximum amount of federal student aid (Stafford loans and Perkins loans) has been offered.

The first option to look at is a tuition payment plan with the college itself. This is a great option because it gives the family the opportunity to pay the bill over the course of 10-12 months with no interest accruing. It is the school’s choice whether or not a payment plan can be arranged for an amount lower then the total bill. We recommend using a tuition payment plan if you can – as this will help you avoid accruing interest. 

The second option is a PLUS loan which is the Parent Loan for an Undergraduate Student. This is one of the most common ways of financing the gap after financial aid. The PLUS loan is a loan that the parent of the student takes out, and the loan remains in the parent’s name during the duration of repayment. What makes this loan a great option in this current market is that it has a fixed interest rate. The rate is currently set at either 7.9% or 8.5% depending on the federal loan program the college participates in. Usually the loan enters repayment after it has been fully disbursed to the school (usually in the Spring), but parents now have the ability to defer this loan while the student is in school.  While this option might help families in the short-term, the loan continues to accrue interest while it is deferred.

Remember, because a PLUS loan is a federal student loan there are no prepayment penalties and the loan features many deferment and forbearance options that borrowers can take advantage of if making payments becomes a challenge.  A basic credit review is performed to determine one’s eligibility for this loan. If a parent is denied this loan based on the credit review, the student is then eligible for an additional $4000 in an unsubsidized Stafford loan as a freshman or sophomore. 

The third option that is often used is a private student loan, also known as an alternative loan. These are loans that are in the student’s name and most usually require a credit worthy co-signer. Nearly all private loans are using variable interest rates that are tied to the PRIME or LIBOR lending rates, and then the lender will add a certain number of percentage points on top of that based on the borrower and co-borrower’s credit history. Since regulations on these loans are not set by the federal government, the terms vary from lender to lender and deferment and forbearance options may not be offered – or if they are, they may not be as comprehensive as those offered for federal student loans. Student Lending Analytics has recently developed a list of lenders currently offering private loans, and features information on each of the loans.  You may also want to check with the Financial Aid Office to see if they would provide a list of private loan lenders. If applying for a private loan, it may be beneficial to apply to more then one lender, because they may not offer the same interest rates.

Some families find using a combination of these three options helps them “fill the gap” on the tuition bill. I hope this helps your family!

Weighing the options,

Rich