When it comes to securing funding for college, learning about the various different loan options can be incredibly stressful. Borrowers have so many different types of loans to choose from, including both private student loans and federal Parent PLUS loans.
However, it's important to note that each type of loan has a few different features you should consider before applying. Private student loans and federal Parent PLUS loans have quite a few differences between them. We'll break down the key differences between these two common loan types so you can choose the best loan option for you.
What is a Parent PLUS loan?
A Parent PLUS loan is a great option for parents looking to help their children secure funding for college. This is essentially an unsubsidized federal student loan given to parents instead of directly to the student. However, if you don't qualify for a Parent PLUS loan, your child may be eligible for other unsubsidized loans provided by the U.S. Department of Education.
Before applying for a federal Parent PLUS loan, you should make sure you have already applied for financial aid through the federal government. You can do so by filling out the FAFSA (Free Application for Federal Student Aid). After you learn how much federal student aid your child qualifies for, you can apply for Parent PLUS loans if necessary.
To qualify for a Parent PLUS loan, you must not have an adverse credit history. You will be subject to a hard credit check to determine your eligibility to receive direct PLUS loans.
Key differences between Parent PLUS loans vs. private student loans
How Parent PLUS loans and private student loans compare on interest rates, fees, maximum loan balance, and loan terms.
Parent PLUS Loan
As low as 2.94% (depending on your credit score)
Origination fees set at 4.228%*
Varies by lender
Maximum Loan Balance
Cost of attendance minus any other federal aid received
Typically, cost of attendance (may vary by lender)
10 to 25 years
5 to 30 years
*Rates accurate as of Feb. 2022
So — what are the main differences between Parent PLUS loans and private student loans? First and foremost, the lenders are different. Parent PLUS Loans are provided to parents by the federal government, usually after the student maxes out their other federal student aid. Private loans are offered by a variety of private lenders and have varying interest rates and other terms depending on your application and creditworthiness.
Private loans and Parent PLUS loans have a few other differences, including:
Variable interest rates: Some private student loans have variable interest rates, meaning they'll change throughout the loan term. Parent PLUS loans exclusively have fixed interest rates.
Maximum loan balance: Parent PLUS loans have a maximum loan amount equal to the total cost of attendance at your child's school (minus other federal aid). Private student loans have no set maximum limits, although different lenders may cap the amount to your cost of attendance.
Repayment options: While Parent PLUS loans are eligible for federal loan repayment plans, private student loans aren't. If you have parent-student loans, you can qualify for federal loan forgiveness programs, income-contingent repayment plans, and direct consolidation loans.
While federal Parent PLUS loans and private student loans are very different ways to fund your college education, they each have their own individual benefits.
Benefits of Parent PLUS loans
The main benefits of federal Parent PLUS Loans vs. private student loans are their fixed interest rates and flexible repayment terms.
The fixed interest rate means you won’t have to worry about getting blindsided with higher monthly payment increases during the life of your loan. But, fixed rates are also available for some private education loans.
While Parent PLUS borrowers are expected to have good credit histories, there are 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 apply for deferment on your Parent PLUS loans. This means that you will have a six-month grace period after your student graduates before you have to start making monthly payments. However, know that interest will still accrue during that time, so the total amount of your loan, as well as your payments, will increase.
Unlike private loans, PLUS loans don't come with lower interest rates that reflect your good credit history. All qualified borrowers have the same interest rate.
And, 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 don't offer the flexible payment options you see from many private lenders. For example, some private lenders allow you to make flat payments or interest-only payments while your child is still in school.
You'll also be unable to transfer responsibility for loan payments to your child, even after he or she graduates. Inrare instances, you may be able to make a case for having your loan discharged, but loan forgiveness on federal loans is notoriously difficult to obtain.
Parent PLUS loan considerations to make
We often hear of parents taking out a federal PLUS loan to fund their child's education, with the idea that the child will eventually take over payments. While the strategy is based on 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, car loan, or other types of credit.
It's also important to realize that federal student loans come with a much lower interest rate than PLUS loans. In recent years, federal student loan rates dropped to 2.75%. Parent PLUS loans, on the other hand, were offered at 5.3%.
Federal student loans also have substantially lower fees, with a 1.057% origination fee. PLUS loans have an origination fee of 4.228%. By contrast, student and parent loans from private lenders generally have no origination fee.
Frequently Asked Questions
Are private loan programs better than Parent PLUS loan programs?
Ultimately, there is no one-size-fits-all solution when it comes to paying for college. Some loan borrowers may benefit more from taking out private student loans, while others may benefit from taking out Parent PLUS loans.
It's important to consider your current credit score, qualifying federal loan programs, and student loan interest rates before making a final decision. For example — if you have excellent credit, you may be able to secure a private student loan with a lower interest rate than a Parent PLUS loan.
Do Parent PLUS loans have higher interest rates than other loan types?
Yes — Parent PLUS loans tend to have higher interest rates compared to both private student loans and federal student loans. However, it's important to note they still qualify for most federal student loan repayment programs like the Public Service Loan Forgiveness.
If your main concern is getting a lower interst rate, you should consider private loans or direct subsidized federal loans.
How long is the standard repayment period for student loans?
Federal student loans and Parent PLUS loans both have a standard repayment period of 10 years. However, you may qualify for the extended repayment period, which lasts 25 years.
Private student loans have repayment periods that last between 5-30 years, depending on the lender.
Learn more about your student loan options with Nitro
Even if you decide that Parent PLUS loans and private student loans aren't for you, Nitro is a great resource to learn more about the ins and outs of student loans. Learn more about how you can secure funding for college by checking out our blog.
Carol Katarsky is a contributing writer for Nitro. She is an award-winning journalist with extensive experience writing about both finance and education. Her corporate and non-profit clients include AIG, Children's Hospital of Philadelphia, and the Project Management Institute. She lives in Philadelphia with her husband, son, and one cat more than she should. Read more by Carol Katarsky