Compare parent student loans: Parent PLUS vs. private student loans

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If you’re looking to help pay for your child’s college education, it’s usually best to first explore scholarships and grants. 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. Federal Direct PLUS Loans (also known as parent PLUS loans) come with fixed interest rates and federal protections, while private student loans can have variable rates and fewer fees. The right choice for you depends on your priorities and 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 had this type of loan in late 2019, according to a Trellis Research report.

You can borrow up to your child’s cost to attend school, minus any other financial aid they receive. Loan costs are a bit higher than those of federal loans designed for students. Parents pay a loan fee of 4.236 percent, which is deducted from the loan disbursement, and an interest rate of 5.3 percent for the 2020-21 school year.

Interest begins accruing as soon as the loan is disbursed, though 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.

How do parent PLUS loans work?

To apply for a parent PLUS loan, follow these steps:

  1. Check your eligibility. Generally, you must 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.
  2. 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).
  3. 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.
  4. 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).
  5. 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 private college loans for parents work:

  1. 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.
  2. Apply for the loan. You may need to supply your identification information, employment history, proof of income and other details.
  3. 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).
  4. 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’s what the best parent loans for college have in common:

  • Low 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 helps you incur less debt.
  • Low or no loan fees: The parent PLUS loan comes with a 4.236 percent loan fee, while private student loans may have no fees. When comparing private loans, look for prepayment penalties, origination or 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 of their loan once they’ve made enough payments or built up enough credit.
  • Eligibility requirements you can meet: 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 with no fees, 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.

How to decide which parent student loan is right for you

The decision between federal 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? Do I have strong enough credit for either option?
  • Would I benefit from extended repayment timelines or income-driven repayment plans?
  • Does a fixed or variable interest rate make more sense for my budget?
  • Are there ways to avoid fees or earn discounts?

The bottom line

Parent student loans allow parents to borrow money and help their kids pay for college. But before taking on this type of debt, make sure that you can afford the monthly payments. You should also make sure that you can afford to save for retirement and other important financial goals. When comparing the federal parent PLUS loan and private parent student loans, make sure you choose the most affordable option that you qualify for.

Featured image by XiXinXing of Shutterstock.

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