Parent Loans for College: Are Parent PLUS Loans for You?
Parent student loans are a great way to help your child cover the cost of higher education. PLUS loans, a type of loan for parent borrowers offered by the federal government, are typically a pretty good deal. However ... they're not always the best deal available.
With any major financial decision, doing some comparison shopping can save you a lot of money. Let's look at the differences between Parent PLUS Loans, private parent loans, and private student loans.
What is a parent student loan?
Parent student loans are student loans taken out entirely in a parent's name to help fund their child's college expenses, including tuition, books, and room and board. Parent student loans are available for parents of dependent undergraduate students under the age of 24.
There are two primary types of parent student loans: federal PLUS loans and parent student loans from private lenders.
Parent PLUS loans
Parent PLUS loans are distributed by the U.S. Department of Education. They are one of three types of loans available through the federal direct student loan program. The other two, subsidized and unsubsidized loans, are available to student borrowers only.
Parent loans are typically a great deal because of their fixed interest rate — throughout the life of the loan, the interest rate on PLUS loans doesn't increase, unlike many parent student loans from private lenders. Parent PLUS loans typically have a 10-year standard loan repayment term.
Through PLUS loans, parents can borrow enough to cover their child's cost of attendance, minus any scholarships, grants, and financial aid the child receives.
Private parent student loans
Private parent student loans are disbursed by non-government lenders like banks, credit unions, and other private lenders.
Loan terms, minimum and maximum loan amounts, fees, penalties, and repayment periods vary by lender. Typically, the loans you're eligible for are based on your income, current debt, and the results of your credit check.
The difference between parent PLUS student loans and federal student loans
Since federal student loan limits top out between $5,500 and $7,500 per year for dependent students, many families consider PLUS Loans to make up the difference.
Federal Direct PLUS Loans for parents (a.k.a. parent PLUS Loans) are often noted on your child's financial aid award letter. However, even though PLUS loans are federal loans, they don't come with the same generous terms and conditions as federal loans offered directly to students.
Key differences between federal student loans and federal parent loans include:
- A higher interest rate — For the 2022-2023 school year, interest rates for PLUS loans are 7.54%, significantly higher than the interest rates on loans for student borrowers, currently at 4.99%.
- Fees — Unlike federal student loans, PLUS Loans have an origination fee of 4.228%. That means if you take out a $10,000 loan, you'll pay an extra $422.80 in fees when the loan is paid out, even before your first interest calculation.
- Not everyone qualifies — If you have an adverse credit history, you may be turned down for a PLUS Loan. If you're denied, you have the option of finding an endorser or making a case for extenuating circumstances regarding your credit history, e.g., past-due balances due to divorce or disability.
- No income-based repayment option — Unlike federal student loans, parent student loan borrowers do not have an income-based repayment option. The closest repayment plan is the Income-Contingent repayment plan (ICR), which caps monthly payments at 20% of your income.
- No grace period — While federal student loan payments are automatically deferred until six months after graduation, PLUS Loans require payment 60 days after disbursement. However, PLUS loan deferment is available up to six months after your child graduates or drops below half-time enrollment. Just be sure to note that interest will continue to accrue during the period of non-payment. While federal student loan payments are automatically deferred until six months after graduation, PLUS Loans require payment 60 days after disbursement. However, PLUS loan deferment is available up to six months after your child graduates or drops below half-time enrollment. Just be sure to note that interest will continue to accrue during the period of non-payment.
Private Loan Cosigning Benefits: Cosigning Vs. Parent PLUS Loans
Just like federal loans have different interest rates for parents and students, so do private loans — and again, students are getting the better deal.
Why? Because students generally need a qualified cosigner to take out a private student loan. With two names on the loan, a lender takes on less risk. Less risk equals a lower interest rate.
But perhaps you'd rather have the debt under your name instead of your child's? Here are few things to consider:
- There are no loans for retirement — Your child will have their entire future to repay their student loans. Comparatively speaking, your retirement is probably coming in a finite number of years. It's not wise to jeopardize your savings on behalf of your child. Plus, taking care of yourself financially benefits your children in the long run. You're ensuring you'll have the resources to care for yourself throughout your "golden years" — so your kids won't have to.
- You can help with payments —Just because the loan is in your child's name doesn't mean you can't contribute to paying it off. In fact, making payments while your child is still in school is an excellent way to help them reduce their future debt load.
- You can often be released from the loan — Many private lenders allow a cosigner release. That means that after the loan holder has made a certain number of on-time payments, the cosigner may be taken off the loan. If a loan is entirely in your name, like it would be for PLUS loans or private student loans, it will remain on your credit report until it's paid off. Cosigning, on the other hand, may give you a faster end date.
The Benefits Of Private Student Loans
Private Student Loan Fees and Interest Rates
|Parent PLUS Loan||Parent Loans through Private Lender|
|Fixed||Fixed or Variable
Depending on lender
7.54 % APR
|Starting at 2.52% APR (variable) or 3.22% APR (fixed)|
*as of Sept. 2022
Private parent loans: With a good credit history, you can pay less
Unlike federal loans, private parent loan rates are determined by your creditworthiness, including your credit score, your employment history, and other factors.
Right now there are multiple lenders offering parent loans at variable rates well under 5% for qualified borrowers. Several are also offering extremely competitive rates on fixed-rated loans, for example Sallie Mae at 5.49%. Tip: See our Best Private Student Loans page to view the most current rates at any time.
There are many private parent student loan options without fees
None of our recommended lenders charge an origination fee for parent loans. Why pay hundreds of dollars to borrow money if you don't have to?
Variable interest rates can dip below PLUS loan fixed rates
In general, variable rate loans are worth considering if you believe you'll be able to pay off the loan quickly and if you're comfortable with a certain amount of fluctuation in your payments.
With starting interest rates around 2%, choosing a variable rate loan may allow you to chip away at the loan principal faster. That's because monthly loan payments are applied to interest first, with the remaining dollars applied to the principal. With a super-low interest rate, more of your payment will go toward reducing the principal amount each month. If you can pay a little extra every month, you'll wipe out your loan balance even faster.
Of course, it's important to remember that variable interest rates can change at any time, which may impact your monthly payment. Be sure to investigate the terms and conditions carefully before making a decision.
Parent student loans FAQ
Can parents take out loans for college?
Yes, parents of dependent undergraduate students can take out federal parent PLUS loans or parent student loans from private lenders.
Do parents need good credit for student loans?
Yes, parents need a good credit score in order to qualify for both federal parent PLUS loans and private parent student loans. A credit score of less than 660 is considered below average, and parents with below-average credit are considered 'high risk,' making it difficult to acquire a loan.
Can parent PLUS loans be forgiven?
Yes, parent PLUS loans can be forgiven through one of two repayment plans: income-contingent repayment (ICR) and public service loan forgiveness (PSLF).
With ICR, parent PLUS loans are forgiven after 25 years of consistent monthly payments. With PSLF, borrowers can apply for forgiveness after 120 payments if they work in a qualifying government or nonprofit job.
Parent PLUS or Private Student Loans: What's your best option?
If you have a solid credit history, a cosigned private student loan for your child may provide the opportunity for the lowest interest rate and the highest cost savings.
However, there are plenty of great parent loan options to choose from as well. When making your decision, remember to consider the total cost of a loan, including fees, repayment choices, and cosigner release options.
See our Best Private Student Loans page to view the most current rates at any time.