- Taking Out a Parent PLUS Loan vs Cosigning a Private Loan
- How a Federal Parent PLUS Loan Works
- Alternatives to Parent PLUS Loans
- Federal Plus Loan vs. Private Loan
- Should You Apply for a Parent PLUS Loan or Private Loan?
- Parent PLUS Loans
- Parent Private Student Loans
- Credit Score
- Repayment Strategy
- Interest Rate
- Forgiveness and Other Benefits
- Parent PLUS v. Private Student Loans: Which Should You Choose?
- Is a Parent PLUS Loan a good idea?
- Final analysis
- Best parent student loans: Private vs. PLUS
- Private student loans vs. Parent PLUS
- Private student loans
- Parent Plus loans
- What is the best student loan for parents?
Taking Out a Parent PLUS Loan vs Cosigning a Private Loan
Once you and your student have discussed the cost of the colleges they’re considering attending and who will be paying for their education, it’s time to get into the details of how to finance it.
If your student needs more money for school beyond federal loans in their name, you may choose to help them out. That’s where direct PLUS loans—more commonly known as Parent PLUS loans—and private student loans come in.
PLUS loans are issued by the federal government to the parent of a qualified student enrolled in school. However, this is not the only option for parents looking to borrow to pay for their child’s education.
There are also private education loans that are issued by private lending institutions, a bank or Earnest.
Understanding the differences between Parent PLUS loans and cosigned private loans will help you decide which is the better option for funding your student’s college education.
How a Federal Parent PLUS Loan Works
Before you can apply for a PLUS loan, you’ll need to file the FAFSA (Free Application for Federal Student Aid). The FAFSA will not only let the US Department of Education and your child’s school determine how much financial aid they can receive, but also which federal loan types your family is qualified for.
Students should max out subsidized federal loans first, because the federal government pays the interest on these loans while they’re in school and during any grace periods or deferments.
Students may also qualify for unsubsidized federal loans, but there is a maximum for how much you can borrow from the government each year—and that number is pretty low compared to tuition costs of many schools these days.
A Parent PLUS loan has a fixed interest rate, which means it will stay consistent throughout the life of the loan. The interest rate for Parent PLUS loans for the 2019-2020 school year is 7.08%. This also means that, although your recent repayment record will be checked to determine if you qualify for the loan, you won’t be eligible for a lower interest rate if you have great credit.
The maximum amount you can borrow is the cost of the school’s cost of attendance minus any other financial aid your student receives. Keep in mind that un a mortgage or other type of consumer loan, the Department of Education process does not review whether your income is ly to make the loan payments manageable so be sure to do a little budgeting on your own.
Parent PLUS loans also come with an upfront origination fee, which is deducted from each disbursement. Right now, the fee is 4.236% of the loan amount.
While you can request a deferment so that you don’t need to make payments until six months after your student graduates or leaves school, interest will still accrue during this time.
Un many other student loan options, a Parent PLUS loan will be in the parent’s name and cannot be transferred to the student—which means that you, the parent, are legally responsible for repaying the loan.
These loans also come with multiple options for repayment plans, so you can choose your current financial situation and future outlook.
Parent PLUS loans are also eligible for consolidation, which then gives you the chance to use an income-driven payment plan that sets your monthly payment at a number that’s deemed reasonable your income.
If you’re having trouble making payments, you may also be able to request a deferment or forbearance, which allows you to lower or temporarily stop payments—though, again, interest will not stop accruing during that time.
Alternatives to Parent PLUS Loans
Since private loans (and their interest rates) are contingent on a strong credit history, your student will ly need a cosigner—that’s you!—to take one out.
Private student loans can have a fixed or variable interest rate, but the specific rate will always depend on the applicant and cosigner’s credit history.
This means that parents with a strong financial profile may be able to qualify for an interest rate that’s lower than a federal Parent PLUS loan by cosigning a private loan. Being a cosigner also means that you and your student are both responsible for repayment.
Loan fees vary by lender, but Earnest’s cosigned private loans, for example, do not come with a disbursement or origination fee. The total amount you’re able to borrow will also depend on the lender and the student and cosigner’s credit profiles.
Private loans don’t come with federal loan forgiveness and repayment options. Some private lenders will let you defer payments until after graduation; others may require you to start making payments while your child is still in school, which can save you money in the long run.
Private loans can be consolidated or refinanced down the road, potentially lowering your interest rate and/or reducing your monthly payment depending on your financial situation at the time you refinance.
Federal Plus Loan vs. Private Loan
Having a fixed rate on your loan can be helpful—it’s definitely nice to not worry about sudden rate increases and know exactly what you’re expected to pay.
You may also want to have those federal loan repayment and forgiveness options that come along with Parent PLUS loans.
But for parents with a strong, established credit history, cosigning a private loan could score you an even lower interest rate and fewer (if any) fees. And paying less in interest or fees is always a good thing.
Once you’ve filled out the FAFSA and learned what types of aid and federal loans your student qualifies for at the various schools they are considering, the next step is to look into which additional loans you and your student may be able to take out so that you can shop around for the loan that works best for your family.
Should You Apply for a Parent PLUS Loan or Private Loan?
While federal student loans, scholarships and grants can go a long way to cover the cost of a student's college education, it's not uncommon for parents to borrow money to chip in.
As a parent, you'll have two main choices to explore: Parent PLUS loans and private student loans. The right one for you will depend on various personal financial factors, but it's important to know how each works and how to pick the right one for you and your child.
While both parent student loan types are available to help pay college expenses, there are some key differences in how they work. Here's what you need to know about each.
Parent PLUS Loans
Parent PLUS student loans are part of a U.S. Department of Education program to help parents pay for a child's college education. Here are the major features to consider:
- Application: To fill out a Parent PLUS Loan application, your child will need to submit a Free Application for Federal Student Aid (FAFSA). The U.S. Department of Education doesn't have a minimum credit score to qualify for a loan, but you may be denied if you have an adverse credit history, which is defined by the agency and includes events such as delinquent debt above a certain amount, bankruptcy or foreclosure.
- Costs: For a given academic year, all parents who qualify for a Parent PLUS loan will receive the same interest rate. For the 2020-21 school year, that rate is 5.30%. The rate is fixed, which means it won't change for the life of the loan. There's also an upfront loan fee that's deducted from your disbursement amount. For loans disbursed after October 1, 2019, but before October 1, 2020, that fee is 4.236% of the loan amount.
- Repayment: Parents can choose to start making payments immediately or defer payments until after their child leaves school. If you're struggling to keep up with payments, you can consolidate your loans and get on an income-contingent repayment (ICR) plan, which may reduce your monthly amount due your discretionary income (the difference between your annual income and 150% of the applicable poverty guideline). The standard repayment term is 10 years, but an ICR plan would extend that to 25 years.
- Other benefits: other federal student loans, Parent PLUS loans are eligible for the public service loan forgiveness program. Also, the federal government generally provides more generous forbearance and deferment options than private lenders.
Parent Private Student Loans
Parents who take out private student loans are working with private lenders, not the government. For that reason, things work a bit differently. Here are some features of private loans to keep in mind:
- Application: Private student loan applicants are subject to a credit check. This means if your credit score or debt-to-income ratio—the percentage of your gross monthly income that goes toward debt payments—doesn't meet the lender's requirements, you may be denied. However, many private lenders will allow you to get prequalified before you apply to see if you're eligible.
- Costs: Each lender offers a range of interest rates, and yours will be your credit history, income and other factors. With good or excellent credit, however, you may be able to score a lower rate than what you'd get with a Parent PLUS loan. Also, some private lenders offer both fixed and variable interest rates—with the latter, your rate will typically start off lower, but can change over time as market interest rates fluctuate. Private student lenders typically don't charge origination or other upfront loan fees.
- Repayment: The terms of your repayment can vary by lender. Check before you apply to see whether you'll need to start making payments now or if you can defer them until after your child graduates. Also, you may be able to secure a shorter or longer repayment term than the 10-year standard with federal loans. Depending on the lender, repayment terms can range from five to 20 years. Most private lenders don't offer income-driven repayment plans.
- Other benefits: Private student loans aren't eligible for federal loan benefits. But some lenders may offer select perks to borrowers, such as interest rate discounts, unemployment protection, reduced rates on other loans and more.
Depending on your situation, you may qualify for both types of parent student loans, just one or neither. Here's what to consider as you're deciding which option is the better choice for you and your child.
The most important deciding factor between the two is your credit score. If you have poor to fair credit scores and a credit report free of any of the negative events that could stop you from qualifying, Parent PLUS loans may be the better option.
A low credit score may disqualify you from being approved for a private student loan. Even if you can get approved, you'd ly be charged a high interest rate, which may make a private loan more expensive than a federal one.
If you have good or excellent credit, more favorable financing terms could be available through a private lender. Take some time to shop around and get prequalified with multiple lenders to see what your options are.
If you want to wait until your child leaves school to start making payments, that option is available with Parent PLUS loans and some private student loans. With private lenders, however, you'll need to double-check before you apply to make sure that's an option.
If you'd rather start making payments now, you can do that with either option.
Also, remember that the standard repayment term on a federal loan is 10 years. If you would prefer a shorter or longer term, consider a private lender instead.
Loans with variable interest rates can present more risk for borrowers than those with fixed rates. If you have plans to quickly pay off your student loan debt—which reduces the chance that interest rates will rise too much—you could save money by opting for a variable rate.
However, if you prefer the certainty of a fixed interest rate, you can go with either option.
Forgiveness and Other Benefits
Only federal student loans qualify for the public service loan forgiveness program, so if you work in public service and plan to do so for at least 10 years, Parent PLUS loans could save you money. If you face financial hardship in your future, you can take advantage of the ICR plan. Also, the federal government's forbearance and deferment options may be more appealing.
Whether you borrow money from the federal government or a private student lender, the impact student loans have on your credit is mostly the same. The only difference is that private lenders will run a hard inquiry on your credit report to assess your creditworthiness, which can temporarily decrease your credit score by a few points.
Either way, parent student loans can represent large debts. Mismanaging either type of loan could have serious credit consequences. To maintain your credit scores, it's crucial that you make your payments on time every month. If you can't, reach out to your lender for some solutions to try to avoid a negative mark on your credit report.
Also, keep in mind that if you cosign a student loan with your child, it can have the same impact on both your and their credit histories if they miss a payment.
On the flip side, if you make all your payments on time, it can help improve your credit score over time.
Finally, once your child graduates, you will have the option to refinance the loans in their name and shift responsibility to them. Keep in mind, though, that both you and your child must be on board to transfer the debt.
If you have time before you need to apply for a parent student loan—or if you don't but plan to borrow for future academic periods—improving your credit score can help you qualify for more favorable terms with private loans, giving you a better chance to save money.
Start by checking your credit score and credit report to see where you stand.
Your credit report will give you the information you need to understand where to focus your efforts as it alerts you to the risk factors helping and hurting your credit score.
For example, it may help you realize late payments in your past or high credit card balances are affecting your scores, and encourage you to be more vigilant in the future.
Building credit can take time, but the potential savings can be more than worth the effort it takes to get there.
Parent PLUS v. Private Student Loans: Which Should You Choose?
If you're figuring out your funding plan for the 2020-21 school year, we have some good news: Record-low interest rates mean there are plenty of great options for both student and parent education loans.
However, it's important to know that rates and terms vary widely between student and parent options. In general, cosigning a private student loan for your child is going to provide the best opportunity for the lowest-possible interest rates and most generous loan terms.
Plus, having the loan in your child's name means that you may be able to be released as a cosigner after a certain number of years. Removing the loan from your credit report may be an increasingly important factor as you get closer to retirement.
Is a Parent PLUS Loan a good idea?
We often hear of parents taking out a federal PLUS loan to find their child's education, with the idea that the child will eventually take over payments. While the strategy is good intentions, it may not be the most cost-effective option.
PLUS loans for parents cannot be transferred. That means that even if your child eventually takes over payments, the loan will remain in your name and on your credit report, which will reduce your debt-to-income ratio. That may be a significant factor if you need to apply for a mortgage, a car loan, or other types of credit.
See also: We Rank Your Best Parent Loan Options: Are Parent PLUS Loans a Good Deal for Fall 2020?
It's also important to realize that federal student loans come with a much-lower interest rate than PLUS loans. For the 2020 school year, federal student loan rates are expected to drop to 2.75%. Parent PLUS loans, on the other hand, will be offered at 5.3%.
Federal student loans also have substantially lower fees, with a 1.059% origination fee. PLUS loans have an origination fee of 4.236%. By contrast, student and parent loans from private lenders generally have no origination fee.
Here's how interest rates and fees compare:
|Federal Parent PLUS Loan||Private Parent Loans||Private Student Loans|
|InterestType||Fixed||Fixed or Variable||Fixed or Variable|
|InterestRate||5.3% APRExpected rate as of July 1, 2020||1.49% – 12.97% APR*||1.25% – 12.99% APR*|
|Fees||4.236% APRAs of June 2020||No fees||No fees|
*Note: Interest rates preferred Nitro lender interest rates, as of June 2020. Borrowers with excellent credit usually receive lower rates.
The fixed interest rate means that you won’t have to worry about getting blindsided with loan and payment increases during the life of your loan. However, fixed rates are also available for private education loans.
While Parent PLUS borrowers are expected to have good credit histories, there are some ways to get approved if your credit is less than stellar.
You can apply with an endorser, which is similar to a cosigner, who agrees to pay the loan if you default. You can also appeal to the U.S.
Department of Education, which will give you the opportunity to explain any extenuating circumstances that might have affected your credit.
You may also have the option to defer payments until six months after your child graduates. However, know that interest will still accrue during that time, so the total amount of your loan, as well as your payments, will increase.
Un private loans, PLUS loans do not come with lower interest rates that reflect your good credit history. All qualified borrowers have the same interest rate.
If you default on a PLUS loan, the federal government can garnish your wages, as well as your Social Security and tax refunds.
Parent PLUS loans do not offer the flexible payment options that you may see from many private lenders. For example, some private lenders allow you to make flat payments or interest-only payments while your child is in school.
You will also be unable to transfer responsibility for loan payments to your child, even after he or she graduates. In rare instances, you may be able to make a case for having your loan discharged, but keep in mind, loan forgiveness on federal loans is notoriously difficult to obtain.
When funding a college education, free money is always your best choice. Be sure to start with the FAFSA (or Free Application for Federal Student Aid) so your child can scoop up any federal grants that might be available. Scholarships are your next best bet. Then, max out federal student loan options.
If you still need funds for college, shop around for the best deals on private student loans or private parent loans. Remember, cosigning a private student loan provides the best potential for low interest rates.
Lenders generally offer a free rate quote without making a “pull” on your credit report, so it's worth your time to compare a few offers.
You may find that you're able to land a deal that beats the federal PLUS loan.
As a time saver, view our preferred picks for the best lenders for private student and parent loans.
Best parent student loans: Private vs. PLUS
Determining the most cost-effective way to borrow for school is essential as college graduates worry about repaying the collective $1.6 trillion in outstanding student debt they owe.
Maxing out direct subsidized and unsubsidized loans first is advisable as these come with the best student loan interest rate, repayment plans, and borrower protections. But those loans have limits. Once they're met, there are only two primary options for undergrads: private loans and Parent PLUS loans.
If you're a parent, then you're going to want to do your research on parent loans for college — a plus or private parent student loan — and determine which best meets your long-term financial goals. Fortunately, an online marketplace Credible can walk you through the various loan products currently available and snag you a good deal. Compare student loan lenders and rates today by clicking here.
For those looking to learn more about school loans, specifically parent student loans, read on.
Private student loans vs. Parent PLUS
What is the best student loan for parents? Well, it depends. But before you make any major decisions, it helps to understand which each offers.
Private student loans
Conversely, private student loans are available to parents, undergraduates, and those attending graduate school.
A student loan interest rate varies by credit score and there's often no origination fee with the best private student loans.
You can even shop for a competitive rate and chose between fixed or variable rate loans — but you must qualify credit and income or get a cosigner to guarantee the loans.
Private student loan lenders take your credit score and credit history into account when determining your student loan interest rate and approval. If you're a potential cosigner or a student who requires a cosigner, then you can browse Credible's loan products and view student loan lenders who allow cosigners.
PRIVATE STUDENT LOAN RATES JUST DROPPED
Parent Plus loans
Parent PLUS loans are available through the Department of Education if students complete the Free Application for Federal Student Aid (FAFSA).
Graduate students can also qualify for Grad PLUS loans in their own name but undergrads can't.
However, while a PLUS loan is a federal loan, they're available only if you don't have adverse credit — and they don't offer all the advantages direct loans do.
Borrowers can pause payments on PLUS loans by putting them into student loan deferment or forbearance. And public service loan forgiveness (PSLF) is available after 120 on-time payments on an income-driven plan. There's also a choice of loan repayment plans, including graduated and extended plans to lower payments.
Unfortunately, PLUS loans are costly. The Parent PLUS loan interest rate is currently 7.08% and there's a 4.236% origination fee.
wise, parents can't qualify for income-based loan repayment or PSLF without consolidating their school loans with the Department of Education first.
Borrowers who extend their loan repayment time also end up paying more due to years of added interest costs (a student loan calculator can help you see how much more).
5 WAYS TO PAY OFF PARENT PLUS LOANS FAST
What is the best student loan for parents?
Private student loans can be much more affordable than PLUS loans if you have strong credit and qualify for a low-interest student loan with no origination fee.
However, student loan forgiveness isn't available and there are fewer options in cases of financial hardship.
Student loan repayment terms won't change without refinancing and forbearance, if available, usually allows payments to be paused for a much shorter time.
Are you looking to refinance your student loans? Use Credible for all of your comparison shopping needs — plus, you can get started on the process from the comfort of your own home. According to Credible, students who had cosigners are “3x more ly” to qualify for a private student loan.
WHAT ARE STUDENT LOAN REFINANCING RATES?
If you may need more time to repay debts or are at risk of an income loss, you may prefer the added protections PLUS Loans provide. And those who can qualify for loan forgiveness would be better off with PLUS loans — as long as parent borrowers are willing to jump through some hoops to get it.
Finally, if your credit score isn't stellar, PLUS loans may be both more affordable and available. While private lenders require good or excellent credit to qualify for low-rate loans, PLUS loans are available at the same rate for any qualifying borrower, regardless of credit score.
While you cannot qualify for a PLUS loan with adverse credit, narrowly defined to include things such as recent wage garnishments or large delinquent loan balances — even borrowers with black marks on their credit history can obtain PLUS loans after documenting extenuating circumstances or getting an endorser who promises to repay the loan if they can't.
Credible makes it easy to compare both fixed interest rate loans and variable interest rate loans from different private lenders in one place without affecting your credit score.
Student debt is a big issue for most graduates and their parents. Although some grads carry a bigger debt burden than others. When borrowing is unavoidable, comparing features of Parent PLUS versus private student loans can ensure students — and the parents who help them — will find the option best suited to meet their needs.
If you think private student loans may fit your needs for college planning, be sure to shop around for the best student loan interest rate and loan term. Find the best student loan rate today.
HOW TO GET A STUDENT LOAN WITHOUT A COSIGNER