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’s anything left to cover, you may choose between two types of parent loans for college: 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 fewer 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 parents can take out to pay for all or some of their child’s college education. About 3.6 million parents have this type of loan at last count, according to the most recent data from the Trellis Company.
You can borrow up to your child’s cost to attend school, minus any other financial aid they receive. With that being said, it’s important to note that loan costs are a bit higher than those of federal loans designed for students. Not only do parents pay an upfront loan fee of 4.228 percent, which is deducted from the loan disbursement, but they are also charged an interest rate of 5.3 percent for the 2020-21 school year.
How do federal parent PLUS loans work?
Interest begins accruing on federal parent PLUS loans as soon as the loan is disbursed, although you can defer payments while your child attends school. Unlike private options, parent PLUS loans are eligible for some federal repayment plans and forgiveness programs.
To apply for a parent PLUS loan, follow these steps:
- Check your eligibility. To qualify, you’ll generally need to be the parent of a dependent undergraduate student, who will need to be enrolled at least half time in an eligible school. Stepparents qualify in some cases, but grandparents and legal guardians do not. You’ll also need to meet eligibility requirements for federal student aid and have a strong credit history.
- Fill out the FAFSA. Before you apply for the loan, your child should first fill out and submit the Free Application for Federal Student Aid (FAFSA).
- Apply for the 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 aid package.
- Receive the funds. The Department of Education will send the funds directly to your child’s school, which applies the money toward tuition, fees, room, board and other school charges. Any funds left over will go 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 graduated repayment plan, an extended repayment plan and an income-contingent repayment plan (if parent PLUS loans are consolidated into a Direct Consolidation Loan).
Parents will need to reapply for the parent PLUS loan each academic year.
How do private parent student loans work?
Private student loans originate from private financial institutions such as banks, credit unions and online lenders. Parents may take out the loan as the primary borrower or co-sign a loan with their child. Here’s how to get a private college loan for parents:
- Shop around. Research a few private student loan lenders and compare loan limits, fees, interest rates and repayment plans. If you’re unsure whether you qualify for a loan, see if the lender offers prequalification.
- Apply for the loan. You may need to supply your identification information, employment history, proof of income and other details.
- Receive the funds. The lender will notify you if you qualify for the loan and explain how to accept the funds. Typically, the lender first sends the funds to your child’s school and then sends leftover money to the borrower (you).
- Choose a repayment plan. Make sure the monthly payment is affordable. You should also understand whether the interest rate will change and what you’ll have to pay in fees. Depending on the lender, you may be able to defer payments while the child is in school.
As with federal college loans for parents, you’ll likely need to reapply each year.
Factors to consider when comparing loans
As a parent, you can choose which type of loan to apply for. So, is it better to get a parent PLUS loan or a private loan? As with any financial product, you’ll need to shop around and compare the loan’s key features.
Here are some of the factors to consider as you compare federal PLUS loans and private loans:
- Interest rates: Tuition and other college costs are already high enough, and student loan interest adds to the cost of these expenses. Getting a low interest rate can decrease your borrowing costs dramatically.
- Loan fees: The parent PLUS loan comes with a 4.228 percent loan fee, while private student loans may not have any fees. When comparing private loans, look for prepayment penalties, origination fees, application fees, late fees and any other type of extra payment you might have to make.
- Co-signer options: Although your child may agree to repay any debt, parent PLUS loans and private student loans in your name are ultimately your responsibility. If you feel that the debt should be a shared responsibility, co-signing a loan that your child takes out makes more sense, because you both legally share the debt. Check whether the loan includes a co-signer release, which would allow your child to take full responsibility for their loan once they’ve made enough payments or built up enough credit.
- Eligibility requirements: Every loan comes with eligibility requirements, so it’s important to review these 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 parent student loans if you can also save enough for retirement. The government may 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 damage your credit rating.
How to decide which parent student loan is right for you
The decision between federal PLUS loans and private parent loans is a personal one. Here are some questions to ask yourself when deciding between parent loans for college:
- Which type of loan do I qualify for? If you have a strong credit score and a long credit history, you may be able to get a much lower interest rate with a private parent loan. To find out about the interest rate you might qualify for as a private parent loan applicant or co-signer, look for online lenders that let you “get prequalified” or “check your rate” without a commitment.
- Would I benefit from extended repayment timelines or income-driven repayment plans? If you want access to longer repayment periods, then parent PLUS loans could be your best option. After all, you could be eligible to repay parent PLUS loans with a graduated or extended repayment plan, or even an income-contingent repayment plan provided you consolidate your parent PLUS loans with a Direct Consolidation Loan first.
- Does a fixed or variable interest rate make more sense for my budget? Where federal PLUS loans come with 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 earn discounts? Where parent PLUS loans charge an upfront loan fee of 4.228 percent just to get started, private student loans often come with no origination fee at all. Meanwhile, some lenders offer autopay discounts you can qualify for.
Parent PLUS vs. private student loan rates
|Parent PLUS loans||Private parent student loans|
|Type of interest rate||Fixed||Fixed or variable|
|Current rates||5.3%||4.94% – 13.99% fixed, 1.04% – 12.99% variable|
|Origination fee||4.228%||Varies by lender|
|Credit check required||Yes||Yes|
|Repayment terms||10 to 25 years||5 to 25 years|
|Borrowing limits||Up to the cost of attendance, minus financial aid||Up to the cost of attendance, minus financial aid|
If you’re a parent who wants to provide financial help for college, either a parent PLUS loan or a private loan could work for your needs. Your best bet is comparing both options based on how much they would cost you over the long term.
Our advice is to check out student loan rates and fees from private lenders and compare them to the fixed, expected costs of parent PLUS loans. If you can save money and secure a comparable monthly payment and repayment timeline with private student loans, doing so could lead to considerable savings.