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PLUS Loans vs. Alternative Loans vs. Home Equity Loans

PLUS Loans vs. Alternative Loans vs. Home Equity Loans

How does a PLUS loan compare with a Home Equity Loan? Is it more financially beneficial to borrow a PLUS loan than an alternative loan? Review the comparisons below of three types of financing options: PLUS loans, Alternative loans, and Home equity loans. You may see that what you thought was the best option, on the surface, may not be the best for you and your family.

FEDERAL PLUS LOAN
Current interest rate: 8.50% fixed, as of July 1, 2006
Borrower: One parent is the only signer
Does loan affect student debt: Does not affect student debt
Fees: 3% origination fee; some charge 1% guarantee fee
Cancellation: Loan is canceled if parent or student dies; also if parent becomes permanently disabled
Forbearance options: Payment postponements available for unemployment and hardship reasons; while student is enrolled parent may request postponement of payments
Payment flexibility: Income-sensitive, graduated, and extended repayment options are available
Repayment terms: Standard plan is 10 years; 25 years is available if loan is over $30,000
Qualifying: Based on credit history; debt-to-income ratio is not considered
Application: Easy process via phone, paper, or on-line.

SPONSOR or ALTERNATIVE LOAN or MEFA LOAN
Current interest rate: Variable, usually without cap, rates change monthly to quarterly; margin over index may be based on the credit of co-signer; look for the lowest possible margin over the index; fixed rate may be available
Borrower: Student is primary borrower, parent co-signs loan and bears equal responsibility for loan repayment; Student does not sign on a Sponsor loan and is not obligated to repay the loan
Does loan affect student debt: Will affect student debt, be careful not to borrow more than $5000 per year; Sponsor loans do NOT affect student's debt
Fees: Some do not charge fees, others may charge disbursement and origination fees
Cancellation: No cancellation provision if parent or student dies
Forbearance options: Payment postponements vary from lender to lender
Payment flexibility: Repayment options vary from lender to lender
Repayment terms: Length of term may vary depending on amount borrowed
Qualifying: Varies by lender; most are based on credit history; debt-to-income ratio of co-signer is considered
Application: Via phone, paper, or on-line; may need to supply additional documentation.

HOME EQUITY LOAN
Current interest rate: Variable or fixed; variable may be capped at 18%; based on Prime Rate or another consumer index
Borrower: Parent, or home owner
Does loan affect student debt: Will not affect student debt
Fees: Varies, but may include home appraisal fee, application fee, origination fee, points, closing costs, and annual fees; Prepayment penalty may apply
Cancellation: No cancellation provision if parent or student dies
Forbearance options: Usually unavailable
Payment flexibility: Payment amount is fixed
Repayment terms: 10 – 30 years
Qualifying: Many factors including credit history, home appraisal, title review, and proof of property insurance
Application: Can be easy and fast if done on-line; may need to provide additional documentation

 



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