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With the cost of a college education rising year after year, many parents are stepping in to help their children foot the bill. If you have a dependent child in school, there are two types of student loans to consider: PLUS parent loans from the federal government and private parent loans from a bank, credit union, or government. an online lender.
Both loan types have their pros and cons, so it’s worth comparing parent PLUS loans to private loans to find the right borrowing solution for your family.
Parent PLUS Loans vs. Private Student Loans
What is a Federal Parent PLUS Loan?
A PLUS parent loan is a type of federal student loan designed for parents who want to help their child pay for college. Offered by the Department of Education, Parent PLUS Loans are available to parents of undergraduate students. Parents whose children are studying for a graduate degree or other advanced degrees are not eligible.
Interest rates and conditions
Parent PLUS loans have the highest interest rate and fees of any federal student loan. Here are the interest rates and the conditions to be expected.
- Interest rate. Parent PLUS loans have a fixed interest rate that remains the same for the duration of the loan. Everyone who qualifies receives the same rate, regardless of their credit score or financial history. For the 2022-23 school year, the interest rate is 7.54%.
- Original fees. You will also have to pay loan fees, which are deducted from the amount you borrow. Loans disbursed between October 1, 2021 and October 1, 2023 have a loan fee of 4.228%.
- Repayment Terms. Parent PLUS Loans are eligible for the 10-year standard and gradual repayment plans as well as the 25-year extended repayment plan. If you consolidate your parent PLUS loan into a direct consolidation loan, it also becomes eligible for income-contingent repayment, which bases your monthly payment on your income and extends for 25 years. After consolidation, you will also be able to choose a repayment term of 30 years, depending on the amount you owe.
- Adjournment and Abstention Options. Parent PLUS loans are eligible for deferment and forbearance, both of which allow you to temporarily suspend payments if you are experiencing financial hardship, returning to school, or have another eligible reason.
- Eligible for Public Service Loan Exemption (PSLF). Parents who work in the public service could have their parent PLUS loans canceled after 10 years of qualifying service and 120 qualifying payments through the PSLF program.
To be eligible for a parent PLUS loan, you must be the biological or adoptive parent (or step-parent in some cases) of a dependent undergraduate student who is enrolled at least half-time at an eligible school. You also can’t have “adverse credit,” but that doesn’t mean you need a high credit score. The Department of Education defines adverse credit as having any of the following:
- An account with a total balance greater than $2,085 that has been past due for 90 days or more or has been placed in collection or charged off within the past two years
- A default, bankruptcy, repossession, foreclosure, federal student debt write-off, wage garnishment, or tax lien within the past five years
If you have adverse credit, you may still qualify if you are able to send documentation to the Department of Education explaining the extenuating circumstances that led to your credit issues.
Alternatively, you can apply for a PLUS loan with a co-signer (also called an endorser) who meets the credit requirement. Keep in mind that this endorser cannot be the student who will benefit from the loan. Either way, you will need to complete a credit counseling course before receiving the funds.
How to register
You can usually apply for a PLUS parent loan on the Federal Student Aid (FSA) website in about 20 minutes. After logging in with your FSA ID, you will provide school, student, personal and employer information along with the requested loan amount.
When you apply, you can indicate how the school should use the funds and whether they should repay you or your child the extra loan money. Although PLUS loan repayment usually begins immediately, you can request a deferral while your student is in school and for six months after leaving school or falling below half-time.
Your child must have already submitted their Free Application for Federal Student Aid (FAFSA) before applying. Note that some schools have their own PLUS loan applications. When you select the correct school on the loan application, you will know if your child’s school has different instructions.
What is a private student loan?
Many banks, credit unions, and online lenders offer private student loans to parents. While a PLUS parent loan is limited to parents of undergraduate students, private student loans are often available to parents of undergraduate and graduate students. If you have good to excellent credit, you may be able to get a better rate on a private student loan than on a PLUS loan.
Interest rates and conditions
- Interest rate. You can usually choose between a fixed and variable rate on a private student loan. If you have good credit, you may be able to get a lower rate than a parent PLUS loan.
- Original fees. Loan fees vary by lender, but many do not charge an origination fee.
- Repayment Terms. Most lenders allow you to choose terms between five and 20 years. Private student loans are not eligible for federal plans, such as income-contingent repayment.
- Postponement and patience. Some lenders allow you to temporarily suspend payments if you are having financial difficulty, but this option is not guaranteed.
- Not eligible for Public Service Loan Cancellation (PSLF). When comparing parent PLUS loans to private loans, a major difference is the potential for loan forgiveness. Private loans are not eligible for the PSLF or any other federal rebate program.
Private lenders look at your credit and income when assessing your eligibility for a loan. Borrowers with the strongest credit tend to get the lowest interest rates. Lenders may also look at your debt-to-equity ratio to determine how your income compares to your other debts.
If you cannot meet a lender’s requirements on your own, you may be able to apply with a creditworthy co-signer. Your co-signer will share responsibility for the debt and their credit will also be affected by the loan.
How to register
Some private lenders allow you to prequalify online without impacting your credit. After providing some basic information, the lender will perform a soft credit check and show you estimated interest rates and loan terms.
If you decide to go ahead, you will submit a complete application with your personal information and all required documents. Check with the lender to find out if you need to start making payments immediately or if you will have a grace period while your child is in school.
Parent PLUS Loans vs. Private Loans: Which Should You Borrow?
When comparing PLUS parent loans to private loans, there is no clear winner. Parent PLUS loans offer a greater range of protections for borrowers, but private student loans may have lower borrowing costs.
Consider a Parent PLUS loan if:
- You don’t have strong credit. Credit requirements for PLUS loans are not as stringent as for private loans, making them easier to access for average to bad credit borrowers.
- You want more flexible repayment options. Federal loans are eligible for a variety of plans, including graduated repayment, extended repayment, and income-based repayment. They also come with deferment and forbearance options if you experience financial hardship or encounter other qualifying circumstances.
- Looking for loan forgiveness. If you work for PSLF, go for a Federal Parent PLUS Loan so you can get it forgiven after 10 years of service.
Consider a private loan if:
- You have good or excellent credit. Borrowers with good credit (or those with a creditworthy co-signer) might be able to leverage their credit to get a competitive interest rate. Depending on your credit, this rate may be lower than what you would get with a PLUS loan.
- You prefer a variable interest rate. Most private lenders give you the option of a variable APR, which could be beneficial in a low rate environment or if you plan to pay off the loan quickly. Remember that variable rates can increase over time.
- You want the option of a shorter repayment term. Many private lenders let you choose a repayment term as short as five years, while federal repayment plans start at 10 years.
Alternative option: Co-sign your child’s student loan
In addition to borrowing a parental loan, you might consider helping your child get a private student loan in their own name. Most undergraduate students need the help of a co-signer to qualify for a private student loan, as they often cannot meet a lender’s income and credit criteria on their own.
As a co-signer, you will also be required to repay the debt and the loan will impact your credit. However, some lenders offer co-signer release after making payments on time for a certain period. With this approach, you can still help your child pay for their education without tying yourself up to student debt for years to come.
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