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 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, a 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. 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|
|Fixed||Fixed or Variable||Fixed or Variable|
Expected rate as of July 1, 2020
|1.49% - 12.97% APR*||1.25% - 12.99% APR*|
As of June 2020
|No fees||No fees|
*Note: Interest rates based on preferred Nitro lender interest rates, as of June 2020. Borrowers with excellent credit usually receive lower rates.
Pros and cons of Parent PLUS Loans
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.
Unlike 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.