Parent PLUS Loans vs. Private Student Loans: Compare Your Options | Student loans and advice

Parents who want to help their children pay for their education may have invested in a 529 college savings plan or have looked into a school’s financial aid program. But often the full cost of attendance — not just tuition, but also books and room and board — isn’t fully covered by savings or financial aid.

In some cases, parents may consider borrowing student loans in their child’s name to bridge the funding gap. There are two main college loan options for parents: Federal Parent PLUS Loans and Private Student Loans.

About 3.7 million borrowers have federal Parent PLUS loans, with an outstanding balance of $104.8 billion in the first quarter of 2022, according to the US Department of Education. This does not even include student loans to parents which are offered by banks and private lenders rather than the federal government.

If you’re trying to decide whether to borrow federal or private loans on behalf of your student, here are some key differences to consider:

  • Interest rates and fees for the Parent PLUS Loan are set by the Ministry of Education, based on the date the loan was issued. PLUS loans have the highest rates of all types of federal student loans.
  • Interest rates for private parent loans can be fixed or variable and are based on the creditworthiness of the borrower. Private loans may offer lower rates than federal PLUS loans for qualified applicants.
  • Parent PLUS loans have federal protections, such as deferment from school and student loan consolidation for income-contingent repayment. They may also be eligible for civil service loan forgiveness.
  • Private loans are not eligible for income-contingent repayment programs or federal student loan forgiveness programs. Private lenders may have their own hardship programs, such as forbearance or deferment.

Federal vs Private Student Loans for Parents

Parent PLUS Loans

Private student loans

type of interest

Fixed

Fixed or variable

Interest rate

7.54%*

Fixed rates from 2.99%**

Variable rates from 0.94%**

Loan origination fees

4.228%*

Varies by lender

Loan repayment term

10 to 25 years old

5 to 20 years

Borrowing limits

Up to school tuition minus federal financial aid

Up to school tuition; some lenders have set limits

Credit requirements

No recent derogatory marks such as foreclosure or bankruptcy

Good credit (mid 600s) or well-qualified co-signer

Type of degree

Can only be used for undergraduate

Can be used for undergraduate or advanced degree

Possibility to co-sign with the student

Nope

Yes

*Federal student loan rates and fees for the 2022-23 academic year.

**Depending on loan conditions and creditworthiness. Includes autopay discount.

How to Choose Between a Parent PLUS Loan and a Private Student Loan

There is no one-size-fits-all college loan solution for parents. The best type of parent student loan will depend on your household’s unique financial situation.

First, you should carefully read your child’s financial aid award letter, which outlines the total cost of attendance and any federal loans or grants they will receive. You will also need to consider your own credit score and income, as well as your ability to pay the monthly student loan repayments.

The factors below can help you decide between a federal or private parental loan.

When to Choose a Parent PLUS Loan

  • You have fair credit. Since interest rates on Federal PLUS loans depend on when the loan is borrowed — not on the applicant’s creditworthiness — a poor credit score won’t result in higher rates. However, you will need to prove that you don’t have a bad credit history, such as a recent foreclosure or bankruptcy.
  • You plan to use federal protections. Although Parent PLUS loans alone are not eligible for income-based repayment plans, you may be able to qualify by consolidating into a new federal student loan. Direct consolidation loans can be repaid under an income-contingent repayment plan.
  • You are a public servant or a non-profit worker. If you took out a Parent PLUS Loan on behalf of your child, you may still be eligible for the Public Service Loan Forgiveness Program, or PSLF. Eligibility is based on the borrower’s qualifying employer rather than the student’s employer.

When to choose a private student loan

  • You have very good or excellent credit. Private parent loan interest rates are based in part on the creditworthiness of the applicant. Parents with excellent credit and a low debt-to-income ratio will qualify for the lowest student loan rates available – which can be much better than Parent PLUS loan rates.
  • You want a variable interest rate. While Parent PLUS loan rates are fixed for the term of the loan, private loan rates can be fixed or variable. You may want to choose a variable rate if you plan to pay off the loan quickly when rates are low, but variable rates carry the risk that your monthly payment will increase over time.
  • You want a shorter loan repayment period. Federal parental loans come with a standard repayment period of 10 years, but private parental loans can be repaid in as little as five years. A shorter loan term results in lower borrowing costs over time, since you pay less interest.

Compare Federal and Private Student Loan Costs

$10,000 student loan repayment for parents

Repayment period Interest rate* Loan fees Monthly payment Interest costs
Federal Parent PLUS Loan 10 years 7.54% $423 $119 $4,269
Short term private loan 5 years 4.24% As low as $0 $185 $1,115
Medium-term private loan 10 years 5.54% As low as $0 $109 $3,047
Long term private loan 15 years old 6.94% As low as $0 $90 $6,149

*Estimated private student loan interest rate based on good credit.

Parent Student Loan Alternatives

Although many parents borrow student loans on behalf of their children, this may not be the right strategy for your unique needs. Paying for your child’s college can make it harder for you to save for retirement, invest in your future net worth, or improve your own financial situation. Here are some alternatives to borrowing student loans from parents:

Co-sign your child’s student loans

When you borrow a parent student loan, you will be solely responsible for repaying that debt. In other words, your child would have no legal obligation to help you pay off the debt and you would be the only party obligated to make the monthly payments.

You might instead consider having your child apply for their own private student loan, with you as a co-signer. This may help your dependent qualify for a private student loan with more favorable borrowing terms, such as a lower interest rate. This means that both parties are responsible for paying off the debt, not just the parent. In the long run, acting as a co-signer on a student loan could also help your child establish a better credit history.

If your child has made regular, on-time student loan payments, you could be removed as a co-signer on the loan. Known as a co-signer release, this would eliminate your financial obligation on the loan.

Payment of your income or savings

According to Sallie Mae, the vast majority of families – 85% of them – depend on parental income and savings to pay for their education. If you have the money to help your child cover college expenses, this option is a better financial alternative than taking on student debt in your own name.

By tapping into a college savings fund, you’ll avoid paying the interest and fees charged by student lenders. It also ensures that you don’t add extra debt payments to your monthly budget. Just make sure you don’t drain your retirement nest egg or emergency fund to pay for your child’s college education.

Opt for a more affordable tuition option

For some families, the right solution may be to cut school fees rather than borrow more money. You should exhaust all of your grant and scholarship options, in addition to considering these strategies:

  • Start your child at a community college. Many states offer low-cost or tuition-free community colleges for select students. Some even offer two-year community college tracks that guarantee students admission to a state public school if they meet certain requirements. As a bonus, your child may be able to live at home during enrollment, which can reduce overall housing and food costs.
  • Find a cheaper school. Opting for a public school over a more expensive private college can help your student secure financial stability after graduation. The average cost of tuition and fees at a private ranked college was $38,185 for the 2021-22 academic year, according to a US News analysis. By comparison, annual public college costs at ranked schools were $10,388 for in-state students and $22,698 for out-of-state students.
  • Encourage part-time employment or a work-study program. With the rising cost of college, your child is unlikely to be able to pay for college with a part-time job alone. But earning even a modest salary can certainly reduce overall expenses, and a work-study program can help your student make connections in a field that can last long into a professional career.