Parents and families are in the process of figuring out how to pay for college. Given that undergraduate Direct loan limits are so low, many parents have to step in to cover the expenses.
When savings and scholarships fall short, the next option often involves borrowing.
For parents, that usually means choosing between a federal Parent PLUS loan and a private student loan. Both options have trade-offs, and understanding the differences can help families avoid added financial strain down the road.
What To Know About Parent PLUS Loans
Parent PLUS loans are federal loans that allow parents of dependent undergraduate students to borrow money to pay for college. These loans are issued by the U.S. Department of Education, not private lenders.
One of the biggest advantages of Parent PLUS loans is access to federal protections – such as income-driven repayment plans, hardship options, and even loan forgiveness programs.
Parents can qualify for Income-Contingent Repayment (ICR), which sets payments at 20% of discretionary income and offers forgiveness after 25 years. These loans may also qualify for Public Service Loan Forgiveness (PSLF) if the parent borrower works for a qualifying government or nonprofit employer.
However, Parent PLUS loans carry a higher interest rate than other federal student loans. For the 2024-2025 school year, the fixed interest rate is 9.08% (which likely will drop to 8.5% for the 2025-26 school year), and there is a 4.228% origination fee deducted from the disbursement.
Unlike other federal student loans, these loans do have a credit check. While the credit check is not as stringent as private lenders, parents with adverse credit history may need a cosigner.
Another downside: Parent PLUS loans are never the student’s responsibility. They stay with the parent borrower unless refinanced or paid off separately.
Pros
- Minimal Credit Requirements
- Potential Loan Forgiveness Options
- Access To Income-Driven Repayment
- Access To Deferment and Forbearance
Cons
- 4.228% Origination Fee
- High Interest Rate
- Loan Only In Parent’s Name
Private Student Loans
Private student loans are issued by banks, credit unions, and online lenders. Some private lenders allow parents to borrow on behalf of their children, or cosign a student’s loan.
One major advantage of private loans is the potential for lower interest rates, especially for borrowers with a good credit score. Fixed and variable interest rates can be lower than those offered by Parent PLUS loans. And unlike federal loans, there are no origination fees with most private lenders.
However, private loans lack the safety net of federal repayment options. There is no income-driven repayment, no forgiveness programs, and fewer deferment or forbearance protections. Repayment terms can also vary by lender, and while some offer flexible options, others may require immediate payments.
Private loans can have rates as low as 3-4% for families with good credit and income.
Some parents choose to cosign a private loan in the student’s name, giving the student responsibility for repayment while still helping them access better loan terms. But cosigning means the parent is still legally on the hook if the student doesn’t pay.
Pros
- Potential For Low Interest Rates
- Loans Can Be In Student’s Name
- No Origination Fees Or Prepayment Penalties
Cons
- Credit-Based
- No Hardship Options
- No Loan Forgiveness Options
How To Choose The Right Option
The best option depends on what matters most to the family. Parents with strong credit and good income might prefer the lower cost of a private loan. Those working in public service or who anticipate needing income-based repayment may benefit more from a Parent PLUS loan.
If forgiveness through PSLF is a possibility, a Parent PLUS loan consolidated into a Direct Consolidation Loan is required to become eligible. Then, the borrower must enroll in ICR and work for a qualified employer. Parents also need to remember it takes 10 years (120 months) of repayment – that’s a long time, especially as retirement approaches.
Parents should also consider whether they want to be responsible for the debt or prefer the student to take on repayment. If the parent borrows a PLUS loan, the student has no legal responsibility to pay it back.
Families should always compare interest rates, fees, and repayment terms. If going with a private loan, it’s smart to shop around with multiple lenders to see who offers the most favorable terms based on credit history.
Final Thoughts
Federal Parent PLUS loans provide more borrower protections but come at a higher cost. Private loans may be cheaper upfront but lack forgiveness and flexible repayment options.
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