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.
Conversations about student loans usually focus on the student, but parents also play an important role in financing their child’s education. This is true in many ways, including the use of parent student loans used to pay for education expenses like tuition, books, and room and board.
You can obtain parent loans, like other forms of student aid, through multiple lenders. Like students, parents can choose between federal student loans, such as the Parent PLUS loan, or private loans from lenders such as Sallie Mae.
While both types of loans are considered student aid, there are significant differences between them, and parent borrowers may find one more suitable than the other.
In this comparison:
- Parent PLUS vs private loans: At a glance
- Parent PLUS loans vs private student loans: What’s the difference?
- Eligibility requirements
- Application process
- Loan repayment
- Parent PLUS vs. Sallie Mae: Which makes sense for me?
Parent PLUS vs private loans: At a glance
Here’s a quick overview of the key components of federal Parent PLUS loans and private loans. Since private student loan terms vary by lender, we’ve also included information about the Sallie Mae Parent Loan as an example of what your private student loan could look like.
|Parent PLUS Loans||Private student loans||Sallie Mae Parent Loan (a private loan)|
|Primary borrower||Parent of a dependent undergraduate student||Parent or student||Parent of a dependent undergraduate student|
|Credit requirements||No adverse credit history||Typically must have a good credit score||Not disclosed; Good credit advised|
|Lender||Federal government||Private lenders||Sallie Mae|
|Interest rate type||Fixed||Fixed or Variable||Fixed or Variable|
|Interest rate||7.60%||3.99% – 14.87%||Fixed: salliemae-psl-21-fixlow% – salliemae-psl-21-fixhigh%|
Variable: salliemae-psl-21-varlow% – salliemae-psl-21-varhigh%
|Repayment terms||Varies by repayment plan|
10 to 25 years
|5 to 20 years||salliemae-psl-21-termlengthrange_y|
|Loan limit||Up to the cost of attendance after other financial aid is applied||Up to the cost of attendance||salliemae-psl-21-amountlow – salliemae-psl-21-amounthigh|
|Fees||4.25%||Varies by lender||Prepayment fee: salliemae-psl-21-prepayfee|
Origination fee: salliemae-psl-21-origfee
Late Payment fee: salliemae-psl-21-latefee
|Cosigner option||Only if parent has an adverse credit history||Varies by lender||Allowed; cosigner release may be available after 12 months of consecutive, on-time payments|
Parent PLUS loans vs private student loans: What’s the difference?
To help you choose between a Parent PLUS loan and a private student loan here is basic information about both, including some significant differences.
Parent PLUS loan overview
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.
Pros of the Parent PLUS loan
- 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
- Though good credit is not required, a credit check will be done to look for adverse credit history.
- The repayment period typically starts once the loan is fully disbursed, though some borrowers may qualify for a six-month deferment grace period.
- Borrowers with good or excellent credit may find better interest rates through private lenders.
Private student loans overview
Private student loans are issued by private banks and student loan lenders, such as Sallie Mae or Discover Student Loans. Unlike PLUS loans, the rates, terms, and qualification requirements associated with these loans vary from lender to lender.
To help a student obtain a loan with low or no credit, parents or other relatives can step in and act as a cosigner and agree to take responsibility for repayment if the student is unable to repay.
However, cosigning isn’t the only way parents can help their child pay for an education. The student loan market includes loans designed specifically for parents who wish to offer financial assistance to their child.
Pros of private student loans for parents
- Lower interest rates than PLUS loans for borrowers with good or excellent credit.
- Flexible loan terms can mean lower monthly payments.
- Low or no origination fees, depending on the lender.
- You may be able to apply regardless of your relationship to the student.
Cons of private student loans for parents
- Borrowers with poor credit may receive higher interest rates than they would with PLUS loans.
- Repayment options are generally less flexible than for federal loans.
- Variable interest rates can increase the overall cost of the loan.
Both federal and private parent student loan lenders maintain minimum lending requirements.
Parent PLUS loan eligibility
One of the key eligibility requirements of the Parent PLUS loan is that you are the biological or adoptive parent of a dependent undergraduate student.
Though the loan is sometimes available to stepparents, it doesn’t extend to foster parents, legal guardians, or extended relatives such as grandparents, aunts, and uncles.
Some federal student loans require that applicants exhibit financial need, but that’s not the case for the Parent PLUS loan. The applicant’s credit history will be considered, 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—like a cosigner—to the loan application.
Private student loan eligibility
Because private lenders can set their own requirements for parent loans, eligibility varies.
Generally, parent borrowers will be expected to meet credit and financial requirements, including having a steady income, a good credit score, and a low debt-to-income ratio (DTI).
As an example, let’s look at Sallie Mae’s Parent Loan eligibility requirements.
Sallie Mae Parent Loan eligibility
To be eligible for a Parent Loan through Sallie Mae, you must meet the age of majority in your state (18 in most states) and be either a United States citizen or a permanent resident. You are not required to be related to the student.
Eligibility, rates, and terms are based on several factors including your creditworthiness. Sallie Mae does not disclose information regarding its credit requirements, but typically, lenders will take into consideration your credit score, credit history, and debt-to-income ratio.
Each lender has its own application process, but typically you’ll need to provide basic information about yourself and your child as well as the institution your child plans to attend.
Parent PLUS loans application process
You can apply for the Parent PLUS loan online through the Federal Student Aid website in about 20 minutes. You can also download and print a copy of the application and submit it by mail.
To apply you’ll need:
- Your own verified Federal Student Aid ID (FSA ID), which you’ll set up on the Federal Student Aid website
- 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
- Your employment information
Private student loans application process
Application processes 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.
Again, we’ll look at Sallie Mae’s application process as an example.
Applying for a Sallie Mae Parent Loan
You can apply for a Sallie Mae Parent Loan online. You’ll need to answer a series of basic questions about your child’s education plans such as the school they’ll attend the type of degree they’ll pursue.
You’ll also be required to enter basic information about yourself, including your Social Security number, which will be used to do a hard credit inquiry; your date of birth, citizenship status, and permanent address.
Once you complete the application and eligibility has been confirmed, you’ll receive a list of quotes for rates and repayment terms. Select the one that’s best for you and complete the loan application.
The types of repayment plans available differ between Parent PLUS and private student loans.
Parent PLUS loan repayment
There are three primary student loan 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 a repayment term of 10 years.
- Extended Repayment: Fixed or graduated monthly payments for up to 25 years. Only applicants that have more than $30,000 in federal Direct Loan debt are eligible.
Private student loan repayment
Private lenders typically require fixed monthly payments and offer repayment terms ranging between five and 15 years. Some extend repayment beyond that, offering 25- to 30-year plans.
Some lenders offer more flexibility, including graduated payments or forbearance periods, which pause payments in the event of financial difficulty such as job loss.
Benefits like this can be useful in times of need, so check with lenders to determine how flexible their repayment plans are and what types of protection, if any, they offer.
Sallie Mae repayment plans
Sallie Mae offers a variety of repayment plans with repayment terms typically ranging from three to 20 years, based on eligibility. To find out which repayment plans are available to you, you’ll need to complete the online application.
Regardless of which repayment term you’re approved for, you’ll have the opportunity to select between one of the following options:
- Interest-only: Make interest-only payments for up to 48 months while your child is in school. This will likely mean lower initial loan payments but a longer repayment term and more interest over the life of the loan.
- Interest + principal: Make principal and interest payments while your student is in school. This option will likely mean faster repayment and lower costs overall.
Parent PLUS vs. Sallie Mae: Which makes sense for me?
Both Parent PLUS loans and private student loans, like one from Sallie Mae, 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.
The answer will depend on on personal factors, including:
- Your current credit score (or your cosigners)
- The interest rates lenders offer you
- Whether or not you find federal protections valuable
Federal student loans, including Parent PLUS loans, offer borrower protections, like the ability to place loans in forbearance for up to five years and the potential for student loan forgiveness. And they often have lower interest rates than private loans.
And if your credit score is low, you could have a hard time securing a good interest rate or being approved at all for a private loan. That’s why it’s typically best to exhaust your federal options first.
However, if you need additional funding and meet the eligibility criteria outlined above, a private student loan, can serve an excellent source for financial aid and can help you cover the remaining costs of your child’s tuition and living costs while they earn their degree.
Further, even though federal student loans often have lower rates, if you have good or excellent credit, you may find that a Sallie Mae student loan or other private loan offers competitive interest rates.
Author: Jennifer Lobb
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