Parent PLUS vs Private Loans: Compare Your Options

Navigating the complex world of student loans can be a daunting task for both students and parents alike.  We’ll take a look at Parent PLUS vs Private Loans based on factors such as eligibility, interest rates, repayment terms, and overall pros and cons to help you make an informed decision and find out which one is right for you.

While both Federal Parent PLUS Loans and Private Student Loans provide a means to finance a student’s studies, they differ greatly in terms of eligibility, interest rates, and repayment terms. It’s crucial to evaluate both options carefully before deciding on one.

A Federal Parent PLUS Loan is a financing option provided by the U.S. Department of Education that provides a parent loan that dependent undergraduate students can utilize to help pay for college expenses up to the cost of attendance minus all other financial assistance. The student is not on this loan and the interest rate is fixed at the time of acquisition.

The Pros of a Parent PLUS Loan

• High Borrowing Limits Parent PLUS loans allow parents to borrow up to the full cost of their child’s education, minus other financial aid received as long as they display the ability to repay the amount in full based on the terms of the parent loan. This provides considerable financial support, particularly for students attending expensive institutions.

• Fixed Interest Rates With Parent PLUS loans, there are no surprises regarding the interest rate. The rate is fixed over the life of the parent loan, making it easier to budget and plan payments.

• Flexible Repayment Plans Repayment terms for Parent PLUS Loans are quite flexible. Parents can start repayment either 60 days after the full disbursement of the parent loan, or choose to defer repayment plans while the student is enrolled at least half-time and for an additional six months after graduation, leaving school, or dropping below half-time enrollment.

• Federal Protections Like all federal student loans, Parent PLUS loans come with certain protections. These include access to income-contingent repayment and the possibility of loan forgiveness after a certain period of payments. However, it is worth noting that the Parent PLUS loans are more limited in their loan forgiveness options than other federal loan programs. Additionally, on-time payments can potentially help improve a borrower’s credit score.

The Cons of a Parent PLUS Loan

• Potentially High-Interest Rates The interest rates on Parent PLUS Loans, while fixed, tend to be a fair amount higher than Private Loans if you have good credit. Over time, this could result in a substantial amount of interest accruing.

• Non-transferrable Debt The debt from a Parent PLUS Loan is in the parent’s name and cannot be transferred to the student. This means the parent is solely responsible for paying off the loan, even if the student has finished or left their program of study.

• Fewer Forgiveness Options Though Parent PLUS Loans are eligible for loan forgiveness under certain circumstances, they don’t offer as many forgiveness opportunities as federal student loans taken out by the students themselves.

• Origination Fee This type of loan includes a loan origination fee, a percentage of the loan amount, that is deducted from each loan disbursement. This means that you’ll get a lower amount than what you had originally applied for.

Related: Can’t Repay Parent PLUS Loans: Here’s Your Guide

Private student loans are often issued by private lenders like banks, credit unions, and sometimes even schools themselves. They are unlike federal loans as their terms can be different and more variable.

The Pros of a Private Student Loan

• Potentially Lower Interest Rates Private student loans can offer interest rates that may be lower than federal loans like the Parent PLUS Loan, especially for borrowers with strong credit scores or a creditworthy cosigner (e.g. a parent)

• High Loan Limits Just like Parent PLUS loans, private student loans often allow students to borrow up to the full cost of their education, giving them more financial flexibility.

• Choice of Private Lender With private loans, students can shop around and choose from a variety of lenders, potentially finding a loan package that best fits their needs.

• Efficient Disbursement Private student loans are generally disbursed directly to the student, providing them with the flexibility to use the funds as needed for their education expenses.

The Cons of a Private Student Loan

• Variable Interest Rates With some private loans, interest rates can be variable, meaning they can increase or decrease over time. This can be a pro and a con. Variable rates usually start quite low which can make the repayment plan more attractive. However, the uncertainty can make budgeting for repayment more challenging as the rates can rise quite drastically over time.

• Strict eligibility requirements Borrowers with little to no credit history may have difficulty qualifying for private loans, and those who do may face higher interest rates. Simply put better credit often equals better loan terms.

• Fewer Repayment Options Unlike federal loans that offer several income-driven repayment plans, private loans tend to have less flexibility when it comes to repayment.

• No Loan Forgiveness Private loans do not offer loan forgiveness options that federal loans do, which could be a disadvantage for borrowers who may be eligible for such programs.

Those last two are really big, especially in a student loan landscape that is evolving as quickly as ours has in the US over the past few years.

OK, so as you can see – there are many things to consider when choosing the type of loan to finance your child’s education from the obvious things like eligibility and overall cost to the more nuanced areas like what kind of degree your child is pursuing and whether you want them to participate in the loan. Let’s dig in.

Are You Eligible for a Parent PLUS Loan?

To be eligible for a Parent PLUS Loan, the following requirements must be met:

• You must be the biological or adoptive parent (or in some cases, stepparent) of a dependent undergraduate student enrolled at least half-time in an eligible program at a participating school.

• Your student must meet the general eligibility requirements for federal student aid.

• You must not have an adverse credit history. If you do, you might still receive a loan by meeting additional requirements.

• You must meet the general eligibility requirements for federal student aid. While borrower eligibility for Parent PLUS Loans does not consider income, it does require U.S. citizenship or eligible non-citizenship, and is dependent on not being in default on any other federal loans.

Please note that meeting these criteria doesn’t guarantee approval for a Parent PLUS Loan. The final decision is influenced by additional factors like creditworthiness.

Are You Eligible for a Private Loan?

There is a lot of variability in the private market but generally speaking, these are common eligibility requirements for private student loans:

• Credit Score A solid credit score is often a key requirement for private student loans. Students without an established credit history may need a co-signer with a strong credit history to qualify.

• Citizenship Most private student loans require borrowers to be U.S. citizens or permanent residents. Some lenders may offer loans to international students who have a U.S. citizen as a co-signer.

• Enrollment in School Typically, students must be enrolled at least half-time in an approved college or university.

• Income Borrowers or their co-signers generally need to demonstrate a stable job or steady stream of income to ensure they can repay the loan.

• Age of Majority Depending on the state, students may need to be at least the age of majority (between 18 and 21) to take out private loans. Otherwise, they may require a co-signer.

Note: The specific eligibility criteria for private student loans can vary from lender to lender; ensure to review the requirements before applying.

What is Your Credit Rating?

If you have strong credit, then you will likely be able to procure a lower rate on the Private market by cosigning with your student. However, if you do not then the fixed terms offered to you through the Parent PLUS Loan should be strongly considered.

What Type of Degree is Your Student Getting?

Additionally, Parent PLUS loans are only available for undergraduate degrees so if your student is pursuing a graduate degree then this option is no longer available to you.

Do You Want Your Student on the Loan?

This is something only you can answer. With the Parent PLUS Loan, you are the sole borrower and therefore the only person legally required to pay back the loan. In a Private Loan or other Federal Student Loan scenario where you may be the cosigner, the student would be responsible, at least in part, for the monthly payments.

Do You Want to Take Advantage of Federal Forgiveness or Repayment Programs?

When you take out a private student loan, you will automatically be excluded from the ever-evolving landscape of student loan forgiveness. If you are a Public Service worker or may be eligible for Income Contingent repayment plans, it is worth considering that before choosing your loan type.

Wanting to stay in the federal student loan universe doesn’t necessarily mean you have to take out a Parent PLUS loan. There are several federal loan alternatives available directly to students that may later be eligible for loan forgiveness options as mentioned above. These include:

• Direct Subsidized Loans: These are loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school.

• Direct Unsubsidized Loans: These loans are made to eligible undergraduate, graduate, and professional students, but in this case, the student does not have to demonstrate financial need.

• Federal Work-Study: This is a part-time employment program, partially federally funded, to help students earn money to pay for college expenses.

While these options may not cover the full cost of attendance, they can help reduce the amount that parents need to borrow and can also come with lower interest rates and more favorable terms than Parent PLUS Loans or private loans. If you’re interested in discussing a student loan strategy, feel free to book a call with me so we can review your specific situation.

Related: Subsidized vs Unsubsidized Student Loans: A Comprehensive Guide

If you’ve decided that the Parent PLUS option is right for you, here’s a brief overview of how to apply.

1. Complete the FAFSA: The student must first fill out the Free Application for Federal Student Aid (FAFSA). This form is used to determine eligibility for all types of federal financial aid, including Parent PLUS loans.

2. Check eligibility: Ensure that you, as the parent, meet eligibility requirements, such as being a U.S citizen or an eligible non-citizen and not having adverse credit history.

3. Apply for the Loan: Apply directly through the Federal Student Aid website. You’ll need to use your FSA ID to log in and start the application process.

4. Master Promissory Note: If you’re approved for the loan, the next step is to sign a Master Promissory Note (MPN), a legal document in which you promise to repay your loan and any accrued interest and fees to the Department.

5. Counseling Session: If it’s your first time borrowing a Parent PLUS loan, you may be required to undergo loan counseling so you fully understand the responsibilities and obligations you are assuming.

6. Loan Disbursement: Funds will be disbursed directly to the school. Any remaining funds will be given to the parent or student (as chosen) for additional education-related expenses.

It’s recommended to apply for a Parent PLUS Loan around the same time as student loan applications, which typically happens in the late spring and early summer.

If your application for a Parent PLUS Loan is denied, here are some options you may consider:

Apply with an Endorser

An endorser is someone who agrees to repay the loan if you cannot. They are similar to a co-signer. If you decide to apply for a Parent PLUS Loan with an endorser, that individual will need to complete the Endorser Addendum.

Appeal the Decision

If you believe that there are extenuating circumstances relating to your adverse credit history, you can appeal the decision with the U.S. Department of Education. If approved, you may be required to complete PLUS Credit Counseling.

Increased Unsubsidized Loan

Denial for a Parent PLUS Loan may make your child eligible for additional Direct Unsubsidized Loans. These are not based on financial need, and your child will be responsible for the interest of the loan, rather than you, the parent.

Other Financial Aid

Consider other forms of financial aid. Scholarships and grants may be available to students, and many do not require repayment. Additionally, you might want to consider private student loans but keep in mind that these often require a co-signer and are based on credit.

There’s a lot to consider when securing funding for your child’s education – your credit score, occupation, overall financial situation, desire to have your child participate in the loan and more can all impact your decision. There is no one-size-fits-all answer here.

Generally, though – we think if you have the following circumstances then one is likely better than the other for you.

When to Choose Parent PLUS Loans

• Maxed Out Federal Student Loans If the student has already taken out the maximum amount in Federal Direct Subsidized and Unsubsidized Loans and still needs additional financial aid, a Parent PLUS Loan could be used to cover the remaining expenses.

• Extensive College Expenses If you’re facing high college expenses that are not adequately covered by other types of aid or savings, a Parent PLUS Loan can provide additional funds up to the total cost of attendance.

• Avoiding Private Loans If you’re looking to avoid private loans which might have variable rates, a Parent PLUS Loan may be a good alternative as it features a fixed interest rate and certain federal benefits and protections.

• Lower Credit Score If you have a low credit score but not adverse credit, then the loan terms and interest rate a Parent PLUS Loan will likely be more beneficial than you would receive from a private lender.

• Ineligibility for Need-Based Aid If your family does not qualify for need-based federal financial aid, a Parent PLUS Loan could be a way to secure federal financing for your child’s education.

When to Choose Private Student Loans

• Maxed Out Federal Aid: If the student has already exhausted their eligibility for federal student aid, including grants, work-study, and federal loans, private student loans can fill the funding gap.

• Relatively High Earnings Potential: If the student is in a degree program that has a high earnings potential after graduation (like medicine or engineering), they may be more capable of handling the high-interest rates and loan amounts that can come with private loans.

• High Credit Cosigner: If the student, or the student’s parent, has a strong credit history and is willing to cosign a private loan, the student may be able to secure a lower interest rate.

• Is an International/Non-Degree Student: International and non-degree students may find private student loans as one of the few borrowing avenues open to them, as they may not qualify for federal financial aid depending on their circumstances.

If you’d like to walk through it together and see if there is a more complex solution available, feel free to book a call with me. I’d love to help.