Parent PLUS loans carry the highest interest rates and fees of any federal student loan, but allow parents to borrow on behalf of a child who has hit their borrowing limits on the more affordable federal loans.
You may be able to get a lower rate on a private student loan, but you’ll often give up some borrower protections that only come with federal student loans, such as access to income-driven repayment plans.
Here are a few of the differences between parent PLUS and private student loans:
- Borrower: With parent PLUS loans, the parent is the borrower. For private student loans the borrower can be either the parent or the student.
- Lender: If you take out a parent PLUS loan, the federal government is your lender. Private student loans, however, are offered by various private institutions like banks, credit unions, and online lenders.
- Terms: With parent PLUS loans, you have access to repayment plans ranging from 10 to 25 years. Private student loans typically offer terms between 5 and 25 years.
Parent PLUS loans vs. private student loans
PLUS loans for parents and graduate students are increasingly popular because borrowing limits on the most affordable federal loans haven’t increased in more than a decade. So more families are facing college funding gaps.
But the high borrowing limits and interest rates on PLUS loans, along with the lack of underwriting, means that it’s easy for parents to get in over their heads. That’s because:
- You can borrow up to your child’s certified cost of attendance, which can be well into the six-figures.
- There’s no evaluation of your ability to repay — the department of education just does a credit check to make sure you don’t have “adverse credit history.”
- PLUS loans carry the highest interest rates and fees of any federal student loans: 7.08% for loans taken out during the 2019-20 academic year, with an up-front fee of 4.236%.
Rates on private student loans can be competitive with PLUS loans, and private lenders won’t loan you money they don’t think you’ll be able to pay back.
Here’s a quick comparison between parent PLUS loans and private student loans.
|Parent PLUS Loan||Private student loan|
|Who is the borrower?||Parent||Student or parent|
|Do you need a cosigner?||Depends on the parent's credit history (if adverse, yes)||Depends on who is taking out the loan and their credit history (but typically the student would need a cosigner)|
|Who is the lender?||Federal government||Various private institutions|
|What’s the interest rate type?||Fixed and set by Congress||Fixed or variable and depends on your credit|
|Do you need to fill out the FAFSA?||Yes||No|
|How much can you borrow?||Depends on the cost of attendance minus other financial aid and the student’s year in school||Some have caps, others limit by cost of attendance minus other financial aid|
|How long does it take to repay the loan?||Typically 10 to 25 years (depends on loan)||Typically 5 to 25 years (depends on loan)|
|Is interest tax-deductible?||Yes||Yes|
How to decide between parent PLUS loans and private student loans
Federal loans offer borrower benefits like income-driven repayment and the potential for loan forgiveness. But parents who take out PLUS loans can only qualify for one income-driven repayment program, ICR, which is the least generous of all IDR programs. It takes more of your monthly income than other IDR plans, and you have to make 25 years of payments before you qualify for loan forgiveness.
Here are other factors to consider before making a decision:
1. Figure out who should take out the loan
Consider a parent PLUS loan if: You’re a parent wanting to take out the loan for your child and have a solid credit history.
Consider a private student loan if: You’re a student wanting to take out the loan (even if this includes a cosigner).
For parent PLUS Loans, parents take out the loan on behalf of their child who is attending college. For private student loans, the student or parent has the opportunity to take out the loan.
If you’re a student wishing to take out loans so your parents don’t have to, you may want to make sure you have as much federal funding as possible before turning to private student loans.
If you’re a parent taking out a private student loan, you may want to think about being a cosigner on your child’s loan, rather than taking out the loan in your own name. This makes your child responsible for the loan along with you. Many lenders offer cosigner release which allows the parent (or other cosigner) to be taken off the loan in the future.
2. Decide if you need a cosigner
Consider a parent PLUS loan if: Your parent has a solid credit history and won’t need a cosigner.
Consider a private student loan if: You or your parent has a solid credit history.
Private student loans allow you to take out loans under the student’s name rather than the parent’s. But a strong credit history can increase the likelihood of approval and secure a lower interest rate. If you don’t have strong credit — or much credit at all — you might need a cosigner. That means you may need to ask your parents or another relative to sign onto your loan with you.
If your parents have a good credit history, they can apply for a parent PLUS Loan to help you through school or as a cosigner on a private student loan for you.
Keep in mind that whoever is on the loan — whether it’s just you, just your parent, or both — is responsible for repaying the loan when the time comes. So if you can’t afford to make payments and fall behind, your credit score will take a hit, and so will your cosigner’s. That might impact who signs onto the loan and if having a cosigner is possible.
3. Consider who your lender will be
Consider a parent PLUS loan if: You prefer loans from the federal government and will fill out the FAFSA anyway.
Consider a private student loan if: You prefer not to have to fill out the FAFSA and want to work with a specific private lender.
Parent PLUS Loans are a type of federal loan administered by the U.S. Department of Education. Because it comes from the federal government, you’ll need to make sure you complete a FAFSA first.
A parent PLUS Loan is a good idea if you’ve exhausted all your other federal loan options and qualify for one. It makes sense if your parent has agreed to do this on your behalf. But it also makes them financially responsible for your education and not you. You’ll need to either work out a repayment plan to your parents or agree that they are paying this portion of your education.
Private student loans, on the other hand, don’t require you to fill out the FAFSA. Private loans come from various private institutions, including:
- Credit unions
- Online lenders
- State student loan authorities
Although the FAFSA isn’t required for private student loans, some lenders limit how much you can borrow based on your cost of attendance minus any federal aid you’ve received. So if you’ve exhausted all of your federal funding options, you can turn to private student loans. Just remember that your school may have to certify the cost of attendance in order to determine how much you’re eligible for, and try to keep the total amount borrowed in line with what you expect your annual salary to be after graduation.
4. Think about the different repayment plans and benefits
Consider a parent PLUS loan if: You want more repayment plan options and hardship options as a backup plan in case you can’t make payments in the future.
Consider a private student loan if: You have a steady job and income and should always be able to make on-time payments.
Parent PLUS Loans, like many federal loans, offer many different repayment options. They also have certain benefits, such as:
- Grace period: Like other federal loans, you’ll be able to choose to start repayment after the six-month grace period ends.
- Direct Consolidation Loan qualification: If the parent PLUS Loan is one of many different federal loans you have, you can include it when you consolidate.
- Deferment or forbearance: If you’re having trouble repaying your parent PLUS Loans, you may qualify for deferment or forbearance. These allow you to temporarily stop making payments on your loans without facing a penalty. But you’re still responsible for the interest that adds up while your parent PLUS Loan is in deferment.
Private student loans, on the other hand, have terms set by the lender, ranging from five years to 25 years, depending on the lender you choose. They typically don’t offer as many benefits as federal loans, but some might offer hardship plans that would allow you to pause payments in case you lose your job or face another type of economic or family emergency. Although you may be able to take a break from repayment, keep in mind that this can cause you to repay your loan for longer.
Check Out: The Best Private Student Loan Lenders
5. Compare interest rates
Consider a parent PLUS loan if: You can afford the higher rates and fees on PLUS loans.
Consider a private student loan if: You can qualify for a lower interest rate.
Once you’ve hit your limits on the most affordable federal loans, it’s worth checking rates on private loans before turning to federal PLUS loans. Rates on parent PLUS loans are much higher than rates for undergraduates: 7.08% for loans taken out during the 2019-20 academic year, with an up-front fee of 4.236%.
When comparing rates on federal PLUS loans to private student loans, keep in mind that unlike private lenders, the federal government is not required to disclose the annual percentage rate (APR). If you begin repaying a PLUS loan immediately on the standard 10-year repayment plan, the up-front fee increases your APR by about a full percentage point. The impact on APR is smaller if you spread your payments out over a longer period of time.
Parent PLUS loans have fixed interest rates which means that when it comes time to repay, you pay the same amount every month. But keep in mind that interest accrues while you’re in school. These are different from subsidized loans, which don’t charge interest until after you graduate or drop below part-time enrollment.
Private student lenders usually offer a choice of a fixed or variable interest rate. With a variable interest rate, your monthly payments could fluctuate based on market conditions. So, for example, you could end up paying less in interest one month and more the next.
If you have a set income every month and can only afford to make payments up to a certain amount, fixed interest rates may be better for you. But if you have a little more wiggle room in your budget and don’t mind taking the chance, a variable interest rate is a good idea. There’s no wrong choice — only which one is right for you and your finances.
Find the right loan for you
If you’re still wondering which plan is right for you, take some time to review your financial situation and ask yourself a few quick questions:
- Can you or your parents qualify for a low rate on a private student loan?
- Are your parents willing to take out a loan on your behalf — whether federal or private?
- Do you have a repayment plan after you graduate?
- Do you have a backup plan in case you can’t make payments?
- Are there other funding options you can take advantage of, like grants, scholarships, or other family contributions, to offset borrowing more money?
Be sure to take advantage of the more affordable federal loan options before turning to a PLUS loan. If you look into private student loans, review all your options and take the time you need to find one that’s the right fit for you.