Private Student Loans vs. Parent PLUS Loans: Which is Best for You?

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Private Student Loans vs. Parent PLUS Loans: Both allow you to help pay for your child’s college education. (Shutterstock)

As a parent, you have two main options to help pay for your child’s college expenses: Parent PLUS Loans and Private Loans. student loans.

The federal government offers Parent PLUS Loans and they offer unique benefits. Private loans come from private lenders, and they may have lower interest rates if you have good credit.

In this article, we’ll go over the key differences between the two types of loans to help you decide which is right for you.

Credible allows you compare private student loan rates from multiple lenders, all in one place.

PLUS Parent Loans vs. Private Parent Loans

Parent PLUS Loans and Private Parent Loans give you the ability to borrow money for your child’s higher education expenses. But they differ significantly in how interest rates are set and how you will repay them.

Parent PLUS Loans

The US Department of Education offers Parent PLUS Loans, which are more formally known as Direct PLUS Loans. Graduate or professional students can take out these loans, as well as parents of undergraduate students.

You usually apply for these loans online through the website. In most cases, you will not qualify if you have a bad credit history, such as bankruptcy or foreclosure within the last five years or a history of late or missed payments.

Parent PLUS loans have a fixed interest rate set by the federal government, which is currently 7.54%. This means that the interest rate will not change as long as you have the loan.

You can borrow up to the full cost of attendance, as determined by your child’s school, minus any other financial aid the student is receiving. When you take out the loan, you also pay a commission of 4.228% of the loan amount. To pay the fees, the government will deduct a portion of the funds from each loan repayment.

Private loans to parents

Private parent student loans have no standard requirements. Instead, individual lenders set their own qualifications, interest rates, and repayment terms. But in general, lenders determine the interest rate based on your credit score. People with higher credit scores will qualify for lower rates, while people with bad credit will get higher rates, if they qualify.

You can find fixed or variable rate private parent loans. Variable rate loans usually start with a lower APR, but this rate can increase over time. Fixed rate loans do not change as long as you have the loan.

You usually have the option of paying all of the principal and interest while your child is in school, or you can make interest-only payments to prevent interest from accumulating. Most private parent loans must be repaid within 15 years, although loan terms may be shorter depending on the lender.

The best private parent loans have no loan fees. Just as with Parent PLUS loans, you are solely responsible for repaying a private parent loan.

Co-signed student loans

A third option to help your child pay for college is to co-sign their student loan. When you do this, your child is the primary borrower of the loan, but you agree to be responsible for repaying the loan if your child defaults.

You may consider co-signing a private student loan with your child. In many cases, students are unable to qualify for a loan on their own, as they may have little or no credit history. By co-signing, lenders also consider your credit. Any missed payments will hurt both your credit and that of your child. Many lenders offer a co-signer release option, which allows you to opt out of the loan once your child has made a certain number of consecutive and one-time payments.

A co-signer is generally not required for federal student loans.

If you need private student loans, visit Credible for compare private student loan rates from various lenders in minutes.

When does it make sense to take out a Parent PLUS loan?

A Parent PLUS loan may make more sense if you have fair credit. With these federal loans, the interest rate is the same regardless of your credit score. If you don’t have major credit issues, but your score just isn’t the best, you can get a lower rate on a Parent PLUS loan than on a private loan.

A Parent PLUS loan may also be the best choice if you want to take advantage of one of the unique repayment plans offered by the government:

  • Standard repayment plan — This is the default repayment plan, where you repay the loan in equal monthly installments for 10 years.
  • Extended repayment plan — This plan offers terms of up to 25 years, much longer than most private loans. This can give you a lower monthly payment than you would with a shorter loan.
  • Progressive repayment plan — This plan can help you if you expect to have a higher income in the future. Your payments start low, but increase over time. Ideally, your earnings should increase with your payment. You also have up to 10 years to pay off your loan under this plan.

If your payments are still too high, you may have the option of combining any Parent PLUS Loans you have into a Federal Direct Consolidation Loan, which gives you the option to enroll in an Income-Based Repayment Plan (IDR ). With these plans, your monthly payment is capped at a certain percentage of your Discretionary Income. This can be a great option if your discretionary income is relatively low.

When does it make sense to take out a private parent student loan?

If your child has exhausted all of their options for federal scholarships, grants, and loans, and you have excellent credit, a private parent student loan may be the smartest choice. You will likely be able to qualify for a lower rate than you would receive with a Parent PLUS loan, saving you money in interest.

Private loans can also be a good idea if you want to opt for a variable interest rate. This option gives you a lower initial rate, although it may increase over time. If you expect to pay off the loan quickly, you may be able to keep the lower interest rate and pay off the loan before it increases.

Likewise, private loans can also make sense if you want a shorter loan term. The standard Parent PLUS loan term is 10 years, while private lenders often offer shorter terms, say three, five or seven years. This can save you money in interest and get you out of debt faster.

With Credible, you can compare private student loan rates without affecting your credit.

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