Parent PLUS Loan vs. Private Student Loan
The Parent PLUS Loan, which is a federal student loan, offers flexible terms and a standard fixed interest rate. However, private student loans may be preferable to parents who have very good or excellent credit, although repayment options may be more limited.
In general, parent student loans work just as you’d assume – the parent takes out a loan and uses it to pay for a variety of school-based expenses including tuition, books, and room and board. The parent is then responsible for repaying the loan.
Parent loans, like other forms of student aid, can be obtained through multiple lenders. Parents also have a choice of either federal loans, such as the Parent PLUS Loan, or private loans originating from private lenders such as Sallie Mae or Wells Fargo. While both types of loans are considered student aid, there are significant differences between them, and parent borrowers may find one is more suitable than the other.
In this comparison:
- Parent PLUS vs. Private Student Loan Comparison
- Parent PLUS Loan Overview
- Private Student Loans Overview
Parent PLUS vs. Private Student Loan Comparison
|Parent PLUS Loans||Private Student Loans|
|Primary Borrower||Parent of a dependent undergraduate student||Parent or student|
|Credit Requirements||No adverse credit history||Typically must have a good credit score|
|Lender||Federal government||Private lenders|
|Interest Rate Type||Fixed||Fixed or Variable|
|Interest Rate||7.60%||3.99% – 14.87%|
|Repayment Terms||Varies by repayment plan|
10 to 25 years
|5 to 20 years|
|Loan Limit||Up to the cost of attendance after other financial aid is applied||Up to the cost of attendance|
|Fees||4.25%||Varies by lender|
|Cosigner Option||Only if parent has an adverse credit history||Varies by lender|
Parent PLUS Loan Overview
Today, millions of parents or guardians have leveraged the Parent PLUS Loan to finance over $77 billion in student educational expenses. This loan, which is funded by the federal government through the William D. Ford Direct Loan Program, is frequently used to fill the gap between college costs, student and parent savings, and student-specific loans. Some parents also choose to use a Parent PLUS Loan instead of tapping into their savings, which may be reserved for retirement or emergencies.
If you’re considering a Parent PLUS loan, here’s what you need to know.
One of the key eligibility requirements of the Parent Plus Loan is that you’re the parent – biological or adoptive – of a dependent undergraduate student. Though the loan is also available to stepparents, as long as they’re married to the child’s parent, it doesn’t extend to foster parents or legal guardians, nor to relatives such as grandparents, aunts, and uncles.
Many federal student loans require that applicants exhibit financial need, but that’s not the case for the Parent PLUS Loan. However, the applicant’s credit history will be considered during the application process, and applicants with “adverse credit” won’t be eligible.
The Department of Education has defined adverse credit as a credit history with one or more of the following problems:
- Being at least 90 days delinquent on outstanding debts exceeding a combined total of $2,085.
- A foreclosure, repossession, tax lien, wage garnishment, default determination, discharge of debts in bankruptcy, or write off of a federal student debt within five years of submitting your loan application.
Applicants with adverse credit may still be eligible for the Parent PLUS Loan if they add an endorser – similar to a cosigner –to the loan application.
If you may be eligible for the Parent PLUS Loan, you can apply online through the Federal Student Aid website. The application generally takes around 20 minutes and can be completed online. You can also submit a paper application by downloading and printing a copy of the application and submitting it by mail.
To apply you’ll need your own verified Federal Student Aid ID (FSA), which can be obtained on the Federal Student Aid website. You’ll also need the name of the school your child will attend; your personal information, such as your name and address; information about the student including Social Security number and date of birth; and your employment information.
Terms & Fees
As with other federal and private student loans, the loan terms and fees for Parent Plus Loans vary based on loan type and the time of disbursement, with repayment terms ranging from 10 to 25 years.
- Parent PLUS Loans that were disbursed on or after July 1, 2018, and before July 1, 2019, will carry a fixed interest rate of 7.6%.
- PLUS Loans disbursed on or after October 10, 2018, to October 1, 2019, will be subject to a 4.248% loan fee, which is deducted proportionately upon disbursement.
There are three primary repayment plans available to Parent PLUS Loan borrowers:
- Standard Repayment: Fixed monthly payment for up to 10 years.
- Graduated Repayment: Monthly payments that start off lower and gradually increase over the life of the loan, with pay off of the full balance required within 10 years.
- Extended Repayment Plan: Fixed or graduated monthly payments for up to 25 years. Only applicants that have more than $30,000 in Direct Loan Debt are eligible.
Pros of the Parent PLUS Loan
Some of the big advantages of Parent PLUS loans include the following:
- Parent PLUS Loans aren’t income dependent, nor do they require good credit.
- PLUS loans offer fixed interest rates, which may be lower than rates offered by some private lenders.
- Parents can pause payments by putting loans in forbearance for up to five years in times of financial need.
- There’s no maximum loan amount.
Cons of the Parent PLUS Loan
PLUS Loans do have some disadvantages to consider, including the following:
- Though good credit is not required, a credit check will be done to look for adverse credit history.
- Repayment typically starts once the loan is fully disbursed, though some borrowers may qualify for a six-month deferment.
- Borrowers with very good or excellent credit may find better rates through private lenders.
Private Student Loans Overview
Private student loans are loans issued by private banks and student loan lenders. Unlike with PLUS loans, the rates, terms, and qualification requirements associated with these loans vary from lender to lender. Both students and parents can take out private student loans to fill gaps between federal financial aid (which you will have to fill out the FAFSA to be eligible for) and the cost of attendance.
Unfortunately, many students find they don’t meet the requirements on their own and must find a cosigner.
The cosigner is often a parent or other relative, so even parents who don’t take out a loan themselves may find themselves legally liable for their child’s academic debt.
Private loans aren’t limited to students, though. There are private student loans available directly to parents in today’s market.
What Are Your Responsibilities As a Cosigner?
If you cosign for a child’s loans, you may think you’re just helping your child secure a loan he’ll be responsible for. In reality, you’re also acting as a co-borrower and are legally responsible for repaying the loan in the event the student isn’t able to meet his obligations.
If a student fails to make payments, the cosigner is responsible for complying with the loan agreement. If the loan goes unpaid and enters into a default status, even if the cosigner isn’t aware of the issue, both the primary borrower and the cosigner face a damaged credit score.
In many instances, the cosigner can be released from responsibility for the loan after a specified number of payments are made on time. Typically, this ranges from around 12 to 36 payments, but requirements for cosigner release vary based on the lender.
Lenders that Offer Private Parent Loans
As the cost of college increases, the availability of loans for parents increases along with it. Today, traditional private lenders including Sallie Mae, Wells Fargo, and Citizen One offer parent-specific loans, as do online lenders such as SoFi and College Ave.
With so many loan options and so much variation in loan terms, it’s important parents shop around to check rates and loan terms.
Eligibility & Applying
Because private lenders can set their own requirements for parent loans, eligibility varies. Generally, parent borrowers will be expected to meet specific credit and financial requirements, including having a steady income, a good credit score, and a low debt-to-income ratio (DTI).
Application processes also vary from lender to lender. Many lenders offer online applications and quick online quotes to help you determine your potential interest rate and maximum loan amount.
Private lenders typically require fixed monthly payments and offer repayment terms ranging between 5 and 15 years. Some extend repayment beyond that, offering 25 to 30-year plans.
Some lenders also offer more flexibility, including graduated payments or forbearance periods, which pause payments in the event of financial difficulties such as job loss. Benefits like this can be useful in times of need, so it’s important to check with the lender to determine how flexible their repayment plans are and what type of protection, if any, they offer.
Pros of Private Student Loans
Some big advantages of private loans for parents include the following:
- Lower interest rates than PLUS loans for borrowers with very good or excellent credit
- Flexible loan terms can lead to lower monthly payments
- Some offer cosigner release after certain obligations are met
- Low or no origination fees, depending on the lender
Cons of Private Student Loans
Private loans also have some disadvantages for parents to consider:
- Borrowers with below average credit may receive higher interest rates than they would with PLUS loans.
- Repayment options are generally less flexible.
- Variable interest rates can increase the overall cost of the loan.
What to Consider Before Getting a Parent Loan
Both Parent PLUS Loans and private student loans can cover expenses associated with your child’s college education. However, choosing the right type of loan often means closely examining both options and determining which suits your present and future needs.
>> Read More: Parents guide to paying for college
For some parents, the Parent PLUS Loan is more accessible and offers more flexible repayment plans. Private student lenders, on the other hand, may offer lower rates, particularly for applicants with a very good or excellent credit report.
Author: Jennifer Lobb
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