Parent PLUS Loans vs. Private Loans: Which Is Best?

With nearly a decade covering personal finance, Rebecca Safier simplifies loans and other complex financial topics to help people manage their money with confidence. Her work has been featured in Forbes Advisor, Buy Side from WSJ, U.S. News & Wor.

With nearly a decade covering personal finance, Rebecca Safier simplifies loans and other complex financial topics to help people manage their money with confidence. Her work has been featured in Forbes Advisor, Buy Side from WSJ, U.S. News & Wor.

With nearly a decade covering personal finance, Rebecca Safier simplifies loans and other complex financial topics to help people manage their money with confidence. Her work has been featured in Forbes Advisor, Buy Side from WSJ, U.S. News & Wor.

With nearly a decade covering personal finance, Rebecca Safier simplifies loans and other complex financial topics to help people manage their money with confidence. Her work has been featured in Forbes Advisor, Buy Side from WSJ, U.S. News & Wor.

Published: Sep 12, 2022, 1:12pm

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With the cost of college rising year after year, many parents are stepping in to help their kids foot the bill. If you have a dependent child in school, there are two types of education loans to consider: parent PLUS loans from the federal government and private parent loans from a bank, credit union or online lender.

Both loan types have their pros and cons, so it’s worth comparing parent PLUS loans vs. private loans to find the right borrowing solution for your family.

Parent PLUS Loans vs. Private Student Loans

Parent PLUS Loan Private Student Loan Interest rates 7.54% for the 2022-23 school year Varies by lender, but can range from about 2% to 13% variable annual percentage rate (APR) or 3% to 14% fixed APR Interest type Fixed Fixed or variable Repayment terms 10 to 25 years (up to 30 years if you consolidate into direct consolidation loan) Varies by lender (typically five to 20 years) Origination fees 4.228% Varies by lender, but many don’t charge origination fees Borrowing limits Up to school’s cost of attendance, minus any other financial aid your child has received Typically up to school’s cost of attendance, minus any other financial aid your child has received Credit requirements No adverse credit Good credit or a qualified co-signer Co-signer allowed Endorser allowed if you have adverse credit Typically yes, depending on the lender Degree type Undergraduate Undergraduate or graduate Tax deductible interest Yes Yes Eligible for Public Service Loan Forgiveness Yes, after consolidating into direct consolidation loan No

What Is a Federal Parent PLUS Loan?

A parent PLUS loan is a type of federal education 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 graduate or other advanced degrees don’t qualify.

Interest Rates and Terms

Parent PLUS loans come with the highest interest rate and fee of any federal student loan. Here are the interest rates and terms to expect.

• Interest rate. Parent PLUS loans have a fixed interest rate that stays the same over the life 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%.
• Origination fee. You’ll also have to pay a loan fee, which is deducted from the amount you borrow. Loans disbursed between Oct. 1, 2021 and Oct. 1, 2023 have a loan fee of 4.228%.
• Repayment terms. Parent PLUS loans are eligible for the 10-year standard repayment and graduated 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 spans 25 years. After consolidating, you may also be able to choose a 30-year repayment term, depending on how much you owe.
• Deferment and forbearance options. Parent PLUS loans are eligible for deferment and forbearance, both of which let you pause payments temporarily if you run into financial hardship, go back to school or have another qualifying reason.
• Eligible for Public Service Loan Forgiveness (PSLF). Parents who work in public service could have their parent PLUS loans forgiven after 10 years of eligible service and 120 qualifying payments through the PSLF program.

Eligibility Requirements

To be eligible for a parent PLUS loan, you must be the biological or adoptive parent (or stepparent in some cases) of a dependent undergraduate student who’s enrolled at least half time in a qualifying 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 one of the following:

• An account with a total balance greater than $2,085 that are 90 or more days delinquent or have been placed in collection or charged off in the past two years
• A default, bankruptcy, repossession, foreclosure, charge-off of a federal student debt, wage garnishment or a tax lien in the past five years

If you have adverse credit, you might still qualify if you’re able to send documentation to the Department of Education explaining extenuating circumstances that led to your credit issues.

Alternatively, you could apply for a PLUS loan with a co-signer (also called an endorser) who meets the credit requirement. Keep in mind that this endorser can’t be the student who will benefit from the loan. Either way, you’ll have to complete a credit counseling course before receiving the funds.

How to Apply

You can typically apply for a parent PLUS loan on the Federal Student Aid (FSA) website in about 20 minutes. After signing in with your FSA ID, you’ll provide school, student, personal and employer information as well as your requested loan amount.

When you apply, you can indicate how the school should use the funds and whether they should return any extra loan money to you or your child. While PLUS loan repayment typically kicks in right away, you can request deferment while your student is in school and for six months after they leave school or drop below half-time enrollment.

Your child must have already submitted their Free Application for Federal Student Aid (FAFSA) before you apply. Note that some schools have their own PLUS loan applications. When you select the correct school on the loan application, you’ll find out 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 parent PLUS loan is limited to parents of undergraduate students, private student loans are often available to parents of both undergraduate and graduate students. If you have good to excellent credit, you might be able to get a better rate on a private student loan than you would on a PLUS loan.

Interest Rates and Terms

• Interest rate. You can typically choose between a fixed and variable rate on a private student loan. If you have good credit, you might be able to get a lower rate than you would on a parent PLUS loan.
• Origination fee. Loan fees vary by lender, but many don’t charge an origination fee.
• Repayment terms. Most lenders let you choose terms between five and 20 years. Private student loans are not eligible for federal plans, such as income-driven repayment.
• Deferment and forbearance. Some lenders let you pause payments temporarily if you run into financial hardship, but this option isn’t guaranteed.
• Not eligible for Public Service Loan Forgiveness (PSLF). When comparing parent PLUS loans vs. private loans, one major difference is the potential for loan forgiveness. Private loans are not eligible for PSLF or any other federal forgiveness program.

Eligibility Requirements

Private lenders look at your credit and income when considering 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-income ratio to determine how your earnings compare with your other debts.

If you can’t 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 be equally affected by the loan.

How to Apply

Some private lenders let you prequalify online with no impact on your credit. After you provide a few basic pieces of information, the lender will run a soft credit check and show you estimated interest rates and loan terms.

If you decide to move forward, you’ll submit a full application with your personal information and any required documents. Check with the lender to find out if you have to start making payments right away or will have a grace period while your child is in school.

Parent PLUS Loans vs. Private Loans: Which Should You Borrow?

When comparing parent PLUS loans vs. private loans, there’s no clear winner. Parent PLUS loans have a greater range of borrower protections, but private student loans might have lower costs of borrowing.

Consider a parent PLUS loan if:

• You don’t have strong credit. The credit requirements for PLUS loans aren’t as strict as they are for private loans, making them easier to access for fair- or 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-driven repayment. They also come with deferment and forbearance options if you run into financial hardship or experience other qualifying circumstances.
• You’re pursuing loan forgiveness. If you’re working toward PSLF, opt for a federal parent PLUS loan so you could have it forgiven after 10 years of service.

Consider a private loan if:

• You have good or excellent credit. Good-credit borrowers (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 might be lower than what you’d 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 the loan off quickly. Just 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

Besides borrowing a parent loan, you might consider helping your child get a private student loan in their own name. Most undergraduates need the help of a co-signer to qualify for a private student loan since they can’t often meet a lender’s criteria for income and credit on their own.

As a co-signer, you’ll be equally obligated to repay the debt and the loan will impact your credit. However, some lenders offer co-signer release after making on-time payments for a certain period of time. With this approach, you can still help your child pay for school without tying yourself to education debt for years to come.

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