Wells Fargo Introduces Student Loan For Parents

Here are the details from the Wells Fargo web page:

• Rates:  4.25% to 10.74% (Prime + 1% to Prime + 7.49%)
• Fees:  No origination fees
• Borrowing limits:  Can borrow up to $25,000 per school year with $100,000 aggregate
• Certification:  No school certification required
• Disbursements:  Directly to parent
• Repayments: Begin once the loan has been funded
• Responsibility:  Adult solely responsible for the loan

The Associated Press provided additional details including: 

• Interest-only payments:  "Borrowers can opt to make interest-only payments for up to 2 years while the student is in school."

The company also includes a comparison of the Wells Fargo parent loan with the Federal Direct PLUS loan, which has a fixed interest rate of 7.9% with 4% origination fees. 

The company describes their target market for this loan as:

"You’re a parent, or sponsor, who wants to help cover a student’s education costs with an affordable student loan option. This loan is available even if the student is enrolled less than half-time, or didn’t complete the FAFSA."

As interest rates begin their inevitable move upward it will be interesting to see how this product will compete against the Federal PLUS loan which has the benefit of a fixed interest rate, lower credit standards and a full deferral option while the child is in school.  What folks who take out a variable-rate loan should know is that if they plan to pay off the loan over a 15-20 year period, they can expect to pay on average 4% more than the starting rate on that loan today (if the past history is any indicator of the future interest rate trends).  So, a loan with a starting rate of 4.25% today will likely average more than 8% over a 15-20 year period. 

Of course, there is also that bothersome thing called human nature which prevents consumers from choosing a fixed rate loan with a higher interest rate when comparing it to a lower rate on a variable-rate loan, which may carry a lower interest rate today but with a high probability will cost more in the future. 

Update (May 22, 2010):  

CNN Money emphasized the attractive features of a Parent PLUS loan as compared to a private loan:  

But parents take note. There's another option out there for you: federal PLUS loans. These are loans designed specifically for parents of undergraduate students. The interest rate is 7.9% fixed with a 4 % fee. And the repayment period is 10 years.

If you run into financial trouble, there's a lot more flexibility with PLUS loans. Say, for example, you lost your job and can't make payments, you may be able to get on an alternate repayment plan, or you can get a deferment or forbearance on your loan.

As a rule, families should borrow federal first.