If you’re looking to help pay for your child’s college education, it’s usually best to explore financial aid options like scholarships and grants first. However, if there is something left to cover, you can choose between two types of parental college loans: Federal Direct PLUS loans and private student loans.
Where Federal Direct PLUS Loans (also known as Parent PLUS Loans) come with fixed interest rates and federal protections, private student loans can have variable rates and lower fees. The right choice for you depends on your priorities and your family’s financial situation.
What is a parent PLUS loan?
Parent PLUS loans are government loans that parents can take out to pay for all or part of their child’s college education. About 3.6 million parents had this type of loan at last count, according to the most recent data from the Trellis business.
You can borrow up to your child’s school fees, less any other financial assistance they receive. That being said, it’s important to note that loan costs are a bit higher than federal loans designed for students. Not only do parents pay an initial loan fee of 4.228%, which is deducted from the loan disbursement, but they also have to pay an interest rate of 5.3% for the 2020-21 school year.
How Do Federal Parent PLUS Loans Work?
Interest begins to accrue on Federal Parent PLUS Loans as soon as the loan is disbursed, although you can defer payments while your child is in school. Unlike private options, PLUS parent loans are eligible for certain federal repayment plans and forgiveness programs.
To apply for a parent PLUS loan, follow these steps:
- Check your eligibility. To be eligible, you will generally need to be the parent of a dependent undergraduate student, who will need to be enrolled at least part-time in a eligible school. In-laws are eligible in some cases, but not grandparents and legal guardians. You will also need to meet eligibility criteria for Federal Student Aid and have a strong credit history.
- Complete the FAFSA. Before applying for the loan, your child must first complete and submit the Free application for federal student aid (FAFSA).
- Apply for a loan. Head to the Direct PLUS loan application for parents to apply. If you qualify, the loan will be included in your child’s financial assistance.
- Receive the funds. The Department of Education will send the funds directly to your child’s school, which will allocate the money towards tuition, fees, room, board, and other school fees. Any remaining funds will come to you (or the student, if you allow).
- Consider your repayment options. Parent PLUS borrowers are eligible for four types of repayment plans: a standard repayment plan, a phased repayment plan, an extended repayment plan, and an income-based repayment plan (if parent PLUS loans are bundled into a direct consolidation loan).
Parents will need to reapply for a parent PLUS loan each school year.
How do private student loans for parents work?
Private student loans come from private financial institutions such as banks, credit unions, and online lenders. Parents can take out the loan as the primary borrower or co-sign a loan with their child. Here’s how to get a private university loan for parents:
- Compare the prices. Research a few private student lenders and compare loan limits, fees, interest rates, and repayment plans. If you are not sure if you qualify for a loan, check to see if the lender offers prequalification.
- Apply for a loan. You may need to provide your credentials, employment history, proof of income, and other details.
- Receive the funds. The lender will let you know if you qualify for the loan and explain how to accept the funds. Typically, the lender sends the funds to your child’s school first and then sends the remaining money to the borrower (you).
- Choose a repayment plan. Make sure the monthly payment is affordable. You should also understand if the interest rate is going to change and what you will need to pay in fees. Depending on the lender, you may be able to defer payments while the child is in school.
As with federal university parent loans, you will likely need to reapply each year.
Factors to Consider When Comparing Loans
As a parent, you can choose the type of loan to apply for. So, is it better to take out a parent PLUS loan or a private loan? As with any financial product, you will need to shop around and compare the key features of the loan.
Here are some of the factors to consider when comparing Federal PLUS loans versus private loans:
- Interest rate: Tuition and other university fees are already high enough, and the interest on student loans adds to the cost of these expenses. Getting a low interest rate can dramatically lower your borrowing costs.
- Loan fees: Parent PLUS loan has a 4.228% fee, while private student loans may not have a fee. When comparing private loans, look for prepayment penalties, origination fees, application fees, late fees, and any other type of additional payment you may have to make.
- Co-signer options: While your child may agree to repay any debt, parent PLUS loans and private student loans on your behalf are ultimately your responsibility. If you think the debt should be a shared responsibility, it makes more sense to co-sign a loan that your child takes out because you are legally sharing the debt. Check to see if the loan includes a co-signer release, which would allow your child to take full responsibility for their loan once they have made enough payments or accumulated enough credit.
- Eligibility criteria: Each loan comes with eligibility conditions, so it is important to review them before applying. If your credit is strong enough to get a better interest rate on a private student loan, you’ll save money in the long run.
- Your financial situation: Only consider taking out student loans for parents if you can also save enough for your retirement. The government can garnish wages, tax refunds, and Social Security checks when parent borrowers default on a federal student loan. And defaulting on any loan, whether federal or private, can hurt your credit rating.
How to decide which student loan for parents is right for you
The decision between federal PLUS loans and private parental loans is a personal one. Here are some questions to ask yourself when deciding between parent loans for college:
- What type of loan am I entitled to? If you have a good credit rating and a long credit history, you may be able to get a much lower interest rate with a private parent loan. To find out the interest rate you may be entitled to as a private parent loan applicant or co-signer, search for lenders online that allow you to “get prequalified” or “check your rate” without a commitment.
- Would I benefit from extended repayment terms or income-based repayment plans? If you want to access longer repayment periods, Parent PLUS Loans might be your best option. After all, you might be eligible for parent PLUS loan repayment with a phased or extended repayment plan, or even an income-tested repayment plan as long as you first consolidate your PLUS parent loans with a direct consolidation loan. .
- Does a fixed or variable interest rate make more sense for my budget? When Federal PLUS loans have a fixed interest rate, private student loans can have either fixed or variable rates. In some cases, a lower variable rate could be more advantageous in the short term.
- Are there ways to avoid fees or take advantage of discounts? Where Parent PLUS Loans charge an upfront fee of 4.228% just to get started, private student loans often have no origination fees. Meanwhile, some lenders offer auto payment discounts that you can qualify for.
Parent PLUS vs Private Student Loan Rates
|Parent PLUS Loans||Private student loans for parents|
|Interest rate type||Fixed||Fixed or variable|
|Current rates||5.3%||4.94% – 13.99% fixed, 1.04% – 12.99% variable|
|Original fees||4.228%||Varies depending on the lender|
|Credit check required||Yes||Yes|
|Repayment Terms||10 to 25 years||5 to 25 years|
|Borrowing limits||Up to tuition fees, less financial aid||Up to tuition fees, less financial aid|
If you are a parent who wants to provide financial aid for college, a Parent PLUS Loan or Private Loan might meet your needs. Your best bet is to compare the two options based on what they would cost you in the long run.
Our advice is to check student loan rates and fees with private lenders and compare them to the fixed and expected costs of parent PLUS loans. If you can save money and secure a monthly payment and repayment schedule comparable to private student loans, it could save you a lot of money.