PLUS vs. private

[montessori2md]

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The interest rate on grad PLUS seems really high, and as I understand it the interest accumulates just like any other loan. So is there any reason not to get a private loan at a lower rate instead, if you can? Some benefit I'm not understanding?

 

[stargirl50]

One reason-- The interest rate on the private loans is generally variable (mine are variable quarterly) and depends on your credit score.

 

[Transmogrifier]

Federal loans die if you die, too. You won't leave the debt with your family.

 

[nogolfinsnow]

Federal loans die if you die, too. You won't leave the debt with your family.

Or even if you get permanently disabled.

 

[GeraldMonroe]

Another disadvantage is that private loans have a fixed repayment schedule. After a certain point, like 4 years after you take them, you have to begin repayment. A private bank has every incentive to take you to collections if, 4 years after you start med school, you aren't ready to start paying up. If you have to take an extra year to finish school, or change your mind and want to go to a different school, the bank is going to demand their money.

8.5% may seem high, but consider this : the best fixed interest rate 30 year mortgages you can get are a touch over 5% interest. Those mortgages have collateral : the house. So, no matter what happens, the bank can seize the house and get a good chunk of their money back.

For a student loan, there's no collateral and considerably more risk. If you default, there's nothing the bank can really seize. So, however the lending agreement is set up, it's basically guaranteed that the bank is going to charge you lots of money in interest above what a mortgage would be. The "variable interest" is one such scam : interest rates are extremely low right now. They will get much higher once the economy recovers and the Fed raises the rates back to normal. Another thing a private lender does is that the interest compounds quarterly or monthly, not after graduation like for PLUS loans.

 

[icarus8]

For a student loan, there's no collateral and considerably more risk. If you default, there's nothing the bank can really seize. So, however the lending agreement is set up, it's basically guaranteed that the bank is going to charge you lots of money in interest above what a mortgage would be. The "variable interest" is one such scam : interest rates are extremely low right now. They will get much higher once the economy recovers and the Fed raises the rates back to normal. Another thing a private lender does is that the interest compounds quarterly or monthly, not after graduation like for PLUS loans.

Here's a question I was thinking of:

Say you took a private loan right now because the interest rates are low, as you've stated. They're variable, too. Say rates go up in a year and the PLUS loan is now a lower rate. What's to stop you from swapping out? i.e., pay off the full private loan amount you owe at that point and take out a PLUS?

 

[GeraldMonroe]

Here's a question I was thinking of:

Say you took a private loan right now because the interest rates are low, as you've stated. They're variable, too. Say rates go up in a year and the PLUS loan is now a lower rate. What's to stop you from swapping out? i.e., pay off the full private loan amount you owe at that point and take out a PLUS?

You aren't allowed to do that, period. Not at all, not ever. You cannot use a PLUS loan to pay off anything but current/upcoming school expenses. Not old loans, nor old tuition bills.

 

[nerdsmakegraves]

You aren't allowed to do that, period. Not at all, not ever. You cannot use a PLUS loan to pay off anything but current/upcoming school expenses. Not old loans, nor old tuition bills.

Hmm so i have a question about that... my COA is 52,000 a year (acutally tuition with books about 33).... so I can take out up to 42 in stafford (sub and unsub) loans then the additional in PLUS loans.. Now, i have Sallie Mae loans which are two of them are super high interest ... i was going to take out the max COA in stafford and PLUS loans and use the refund which should be around 20,000 and pay down those private loans...

How would they know i was doing this?? Is there something i am missing and i would not be able to do this?? I know this is robbing peter to pay paul but i would rather owe the government then Sallie Mae!!

thanks!!

 

[GeraldMonroe]

How would they know i was doing this?? Is there something i am missing and i would not be able to do this?? I know this is robbing peter to pay paul but i would rather owe the government then Sallie Mae!!

They wouldn't, and that's fine. The rules are that you can't borrow more than the "cost of attendance" for school. Medical schools tend to set the CoA budget with enough living allowance money for a single student to live reasonably well. If you cut costs to the bone, it's possible to have leftover money, and in practice you can spend that money on whatever you like, including paying down old debts.

What they won't do is give you more money than the nominal cost of attendance in order for you to use that money to pay old debts.

Which begs the question...if you use that $20,000 to pay old debts, what will you live on?

 

[nerdsmakegraves]

Which begs the question...if you use that $20,000 to pay old debts, what will you live on?

I am super lucky that my bf will be supporting us the next four years... i may need to keep 5,000 of that 20,000 but we are going to try really hard to take all the extra money and feed the Sallie Mae beast!

 

[GeraldMonroe]

Well, then, from another perspective : you're using the financial aid money to live on, and your boyfriend is paying your Sallie Mae debts in return for the obvious. Net result : you are obey the rules and spending the financial aid money legally.

 

[AMDFAO]

The feds won't allow you to borrow extra to pay off old loans (above your COA) but you may use the extra you don't need to live on and flip it on the alt loans. I will confess I have encouraged more than a few students to do that over the 4 years of DMD so they leave with no alternative debt. My logic: Some of their alternative loans had limited deferment periods that would not allow them to defer them for specialty or they had no idea of what they had borrowed and the risk etc. With a good 4 year plan and tight budgeting they came in and borrowed the max they could later in the year and flipped it on the alt loans at the end of year 1, 2, 3. The end makes more sense since you never know when you will need the extra cash along the way during the year so it's important to not leave yourself short and I certainly know enough folks who would spend it if they had it in their account (myself included)-- out of sight, out of mind. The end of the year I'd define as late April/early May just in case tragedy occurs so I have enough time to straighten it out. If you are certain you can make the rest of the summer before classes start again, send the check in and if not, hang onto it until you get your fall money.
Although one of the posters is correct: it's not "legal" I think it's the right thing to suggest as an FA person to someone with crappy alt loans from undergrad. My colleagues may not "suggest" it but none of us is following you around to see where the money went nor do you need to advertise your plan.
Swapping a PLUS for an alt loan won't work unless you have the FA office cancel the alt and originate a PLUS at the same time and this has to be done during the same academic year. Some alt lenders will cancel the interest when it's cancelled by the school and some have a time limit. Personally, I wouldn't encourage my kids to do that and not just because it would drive me hoopy-- the total amount they'd save by doing it that way wouldn't be worth the aggravation of tracking lenders and credit reports.