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Parent PLUS Loans vs. Cosigning Education Loans: What Is the Difference?

It’s no secret that paying for college and graduate school can be expensive. Along with purchasing a home, receiving a degree or two from a higher education institution can be one of the most costly (yet rewarding) financial steps of a person’s life. For most traditional college students, this decision is made at an age where the magnitude of the financial implications is too abstract to grasp.  Many students begin college around 18 years old, and with Forbes’ estimated average yearly tuition cost of $43,500 per year, funding often requires assistance in the form of student loans. Some students take out loans in their own names to pay back after graduation, but since annual loan limits in the federal program have not increased proportionately with rising tuition rates at many four-year colleges, parents often choose to help their children fill the financial aid gap with loans designed especially to supplement additional education costs.  Parent PLUS loans or cosigning a loan are the top two options for parents looking to help fund a child’s college education — but what is the difference, and which is right for you?

Cosigning a Loan

Cosigning a loan makes both the parent and the child mutually responsible for repayment. While a student does not need a cosigner to qualify for most federal loans, having a parent cosigner increases the chances of being approved for private loans needed to meet the total cost of attendance. The parent is not solely responsible for the loan, but if the child defaults or fails to make timely payments, the parents are required to take responsibility or risk damaging their credit score. Some experts caution parents against cosigning student loans, but in some cases it may be necessary in order for the child to be approved by private lenders.

Parent PLUS Loans

A Parent PLUS Loan is simply a federal education loan taken out by parents to help pay for their child’s tuition. What makes it different from other student loans is that the parent assumes complete financial responsibility for the loan. In other words, if the payments are not made on time, it affects the credit score of the parent. While some parents may be eager to help foot the bill for their child’s education, it is recommended to take advantage of Direct Loans first before taking out a Parent PLUS Loan. PLUS loans typically involve higher interest rates and fees than Direct Loans, and there is no grace period — the repayment process begins as soon as the final disbursement is made. Parent PLUS Loans are available to the parents of dependent undergraduate students and offer one way to curtail the amount of debt that the child accumulates.

Which is the Right Move?

If you are a parent considering ways to help your child pay for college, it is crucial to understand the differences and financial implications of both options. Both Parent PLUS Loans and cosigning a loan carry varying degrees of financial risk, and both are options for parents who want to make sure their child is not taking on too much debt. However, remember that parents can always help pay for lower-cost loans that are solely in their child’s name, which may save everyone money. Ultimately, it is a personal choice that depends on the financial situation and preferences of the family.

Are you a parent who financially supported your child’s education through a Parent PLUS Loan? See what  options are available for refinancing your loans into flexible repayment plans and competitive interest rates that could lower your monthly payments or total cost of the loan.

LIBOR Rates, Historical LIBOR Rates, and Variable Rate Loans

Variable rate loans have interest rates that vary and are based on a financial market index that changes over time. One very well-known financial market index that many variable rate loans are based upon is the London Interbank Offer Rate, or LIBOR. Understanding this financial index and how it is determined is important when evaluating variable rate loan products.

What are LIBOR Rates?

LIBOR is a benchmark rate that banks charge each other to borrow money. More important to borrowers, however, is that this rate is the first step involved in calculating short-term interest rates on a variety of loans — like student loans, mortgages, credit cards, etc. LIBOR is determined daily and is based on rates that a reference panel of banks can borrow from other banks on the London market for each calculated currency, including the U.S. dollar (USD), Euro (EUR), pound sterling (GBP), Japanese yen (JPY), and Swiss franc (CHF).

 

You may have noticed that the definition of LIBOR is included when calculating rates for variable rate loans. LIBOR’s seven available maturities and associated rates are: overnight, one week, and 1, 2, 3, 6, and 12 months. These maturity figures state the cyclical duration for which the variable interest rate can change on your loan. For instance, the interest rate on a one-week term can change weekly, and the 3-month term can change every 3 months (or quarterly). Because these cyclical changes may change your loan’s interest rate, it is important to note that your monthly payment and the total expected interest owed over the life of the loan may change as well.

 

To see which maturity is associated with your variable rate loan, look for the timeframe before the word LIBOR found on your promissory note. You can also read the loan agreement to understand how often the interest rate is subject to adjustment and understand how to identify the correct index amount.  For example, Education Loan Finance’s variable rate loans are subject to adjustment quarterly based upon the 3-month LIBOR, while other lenders may adjust rates more frequently by basing rates upon the 1-month LIBOR.

LIBOR Changes and Your Interest Rate

While variable rate loans, whether refinanced or not, tend to have starting rates that are often lower than fixed loan rates for the same maturity date, these variable rates can change after you close on your loan — including the possibility to increase over the life of your loan. Changes in LIBOR result in changes to your variable rate loan’s interest rate.

 

Here is how it works: If the 3-month LIBOR is 0.4 percent and Education Loan Finance’s (or your lending institution’s) margin is 3 percent, then your monthly rate would be 3.40 percent for those three months. However, if the 3-month LIBOR changes to 1 percent in the next quarter (remember, this scenario is working on a 3-month cyclical change), then your monthly rate would increase to 4 percent for those next three months.

 

If the LIBOR increases dramatically to a rate such as 15 percent, Education Loan Finance actually puts a 9.95 percent interest rate cap on the interest rate that you will be charged for 5, 7, 10, 15, or 20-year variable rate loan terms. This means that no matter how high the LIBOR rate increases, you will never pay more than 9.95 percent interest on the aforementioned variable rate loans if you choose a variable rate loan and refinance your student loan with Education Loan Finance.

 

What are Historical LIBOR Rates?

Historical LIBOR shows borrowers and consumers the variability in rates over the years. These historical data provide insight into the magnitude of LIBOR rate changes in the past.

 

Historical LIBOR rates can be reviewed and downloaded here. Simply change the frequency to the desired maturity and make sure the date range is accurate. Scroll down and select ‘download data’ to view the rates for your selected time period. Another option is to view multiple maturities at one time, over thirty years, on this scrolling chart. Whichever you choose, please note that these links are provided for historical purposes only. You should always refer to the terms of your promissory note for details  — like date, source, time period — on how the rate for your loan will be determined.

 

Like many lending or refinancing institutions, Education Loan Finance’s variable rate loans are tied to 3-month LIBOR rates, which means they are subject to change based on this publicly available index. The big takeaway is that while there are no guarantees with variable rates, they do tend to start at lower rates than rates on fixed-rate loans with the same term. If you decide to initially refinance your student loan debt with a variable rate loan product, just remember that if rates begin to increase, you can refinance again in the future with a fixed rate loan from Education Loan Finance at no cost to you.

 

Top Tips for Finding the Perfect Lender to Refinance Student Loans

The Differences Between Fixed and Variable Rate Loan Refinancing

What is the difference between a fixed rate and a variable rate loan?

Which option is best for refinancing a student loan?

When borrowers begin to consider their options regarding refinancing a student loan, one of the most commonly asked and most heavily debated questions revolves around deciding between fixed and variable rate loans. While the details of each loan type are fairly simple, the crux of the debate is centered around what will be right — and best — for you. If you are still undecided, take a look at the following details to help you better understand and choose between a fixed or a variable rate loan.

Fixed Rate Loans

A fixed rate loan is a loan that has an interest rate that does not change over the life of the loan. This means you will pay the same amount in interest each month, but it also means you will know exactly how much interest that you will pay over the life of the loan.

Variable Rate Loans

Variable rate loans, on the other hand, have an interest rate that will fluctuate during the term of your loan. These fluctuations are directly linked to changes in common financial indexes, such as the LIBOR index, typically by adding the current index amount to a fixed margin defined by the lender to determine the current rate. Compared to fixed rate loans, variable rate loans tend to have lower starting interest rates for the same term, but this can change (and increase) after your loan closes. However, most lending institutions, including Education Loan Finance, put an interest rate cap on variable rate student loans. For example, Education Loan Finance caps its variable rates at 9.95 percent on 5, 7, 10, 15, or 20-year variable rate loans. This means that no matter how high the LIBOR rate may increase, you will never pay more than 9.95 percent interest, if you choose a variable rate refinanced student loan through Education Loan Finance.

What Is Your Best Option?

Fixed rate loans tend to be best for borrowers who want to know exactly how much they will be paying over the life of their loan, but they may also be best for borrowers who:

  1. Want a consistent payment.
  2. Are on a tight budget.
  3. Want to eliminate any risk of interest rate changes during their repayment period.

Variable rate loans, conversely, may be best for borrowers who:

  1. Are looking for the greatest savings potential.
  2. Have a flexible budget, should interest rates rise.
  3. Plan to pay back their loan in a shorter amount of time.

Deciding between fixed and variable rate loans on a refinanced student loan, therefore, ultimately depends on what is best for you, your budget, and your personal situation. Plus, you always have the option to refinance your student loan from fixed to variable and vice versa. For instance, if you choose a variable rate loan and you are concerned that rates will continue to climb to a rate with which you are not comfortable during your repayment term, you always have the option to consider refinancing to a fixed rate at no cost to you. Have any more questions? Contact us or give us a call at 1-844-601-ELFI (3534).

Saving Up for the Holidays

It is officially November, which means it is the beginning of the most wonderful time of the year — the holiday season! It is also the season of giving, and while you want to spread the holiday cheer, showering your loved ones with gifts in the week leading up to the holidays is not easy on the wallet. In order to do this without breaking the bank, it is a good idea to start saving up at least a month or two in advance so you will have some wiggle room in your budget. Here are some money-saving tips to try as we approach the holidays:

  • Set a Budget

As with every financial decision or purchase, you will need to assess your budget, income, and savings to determine how much to spend on gifts. From there, set a holiday spending limit (around 1 to 1.5 percent of your annual income is recommended). Remember that this amount will include not only gifts, but it should also include any food, gift wrapping items, travel expenses, and decorations as well. Now that you know the amount of money you will be spending, make a list of all the people you need to buy for and set limits for each person. Divvying up your money and setting limits will save you from overspending.

  • Dedicate a Place to Put the Funds

Because you are saving up for something in particular, it may be helpful to separate your holiday savings from your main savings or checking accounts. Whether you store cash in a special place in your home or open a separate account with your bank, keeping your holiday fund in a different spot will ensure that you do not dip into it before you need to.

  • Save the Money

You have an amount you need to save, a place to put it, and only a few months to save. Some may choose to borrow from their main savings account to help, but this may not be an option for others who need to come up with all the gift-giving money outright. For those individuals, it is time to get creative and find ways to fill up your holiday fund to the amount you set. Try a “no-spend” week or month. Set a goal to not go to restaurants and cook more at home instead. Use up all your gift wrapping materials before you buy new ones. Sell furniture, gadgets, clothes, and other items you do not use anymore. Use coupons to cut down on spendings for groceries and toiletries. There are endless possibilities to reduce spending and fill that holiday account with money. If you are on Pinterest, check out our “Money Tips” board for more inspiration.

Relieve Financial Stress This Holiday Season

The holiday season is supposed to be enjoyable and relaxing — not stressful. Instead of waiting until the last minute, saving ahead and budgeting can help tremendously when it gets down to the wire. You will be able to give generously to your family and friends without feeling guilty about your spending, thereby saving yourself from financial stress. Happy holidays!