Should You Apply for a Parent PLUS Loan or Private Loan?

Should You Apply for a Parent PLUS Loan or Private Loan? article image.

While federal student loans, scholarships and grants can go a long way to cover the cost of a student's college education, it's not uncommon for parents to borrow money to chip in.

As a parent, you'll have two main choices to explore: Parent PLUS loans and private student loans. The right one for you will depend on various personal financial factors, but it's important to know how each works and how to pick the right one for you and your child.

Parent PLUS Loans vs. Parent Private Student Loans

While both parent student loan types are available to help pay college expenses, there are some key differences in how they work. Here's what you need to know about each.

Comparing Parent PLUS and Private Student Loans
Parent PLUS LoansParent Private Student Loans
Requires a credit checkYes, though there's no required minimum credit scoreYes
Interest ratesFixed; same for everyone who qualifiesFixed or variable; can vary based on several factors
Loan feeYesNo
Standard repayment terms10 years5 to 20 years
Access to income-driven repaymentYesNo, generally
Other benefitsAccess to public service loan forgiveness, generous forbearance and deferment optionsBenefits can vary by lender
Can refinance in child's nameYesYes

Parent PLUS Loans

Parent PLUS student loans are part of a U.S. Department of Education program to help parents pay for a child's college education. Here are the major features to consider:

  • Application: To fill out a Parent PLUS Loan application, your child will need to submit a Free Application for Federal Student Aid (FAFSA). The U.S. Department of Education doesn't have a minimum credit score to qualify for a loan, but you may be denied if you have an adverse credit history, which is defined by the agency and includes events such as delinquent debt above a certain amount, bankruptcy or foreclosure.
  • Costs: For a given academic year, all parents who qualify for a Parent PLUS loan will receive the same interest rate. For the 2020-21 school year, that rate is 5.30%. The rate is fixed, which means it won't change for the life of the loan. There's also an upfront loan fee that's deducted from your disbursement amount. For loans disbursed after October 1, 2019, but before October 1, 2020, that fee is 4.236% of the loan amount.
  • Repayment: Parents can choose to start making payments immediately or defer payments until after their child leaves school. If you're struggling to keep up with payments, you can consolidate your loans and get on an income-contingent repayment (ICR) plan, which may reduce your monthly amount due based on your discretionary income (the difference between your annual income and 150% of the applicable poverty guideline). The standard repayment term is 10 years, but an ICR plan would extend that to 25 years.
  • Other benefits: Like other federal student loans, Parent PLUS loans are eligible for the public service loan forgiveness program. Also, the federal government generally provides more generous forbearance and deferment options than private lenders.

Parent Private Student Loans

Parents who take out private student loans are working with private lenders, not the government. For that reason, things work a bit differently. Here are some features of private loans to keep in mind:

  • Application: Private student loan applicants are subject to a credit check. This means if your credit score or debt-to-income ratio—the percentage of your gross monthly income that goes toward debt payments—doesn't meet the lender's requirements, you may be denied. However, many private lenders will allow you to get prequalified before you apply to see if you're eligible.
  • Costs: Each lender offers a range of interest rates, and yours will be based on your credit history, income and other factors. With good or excellent credit, however, you may be able to score a lower rate than what you'd get with a Parent PLUS loan. Also, some private lenders offer both fixed and variable interest rates—with the latter, your rate will typically start off lower, but can change over time as market interest rates fluctuate. Private student lenders typically don't charge origination or other upfront loan fees.
  • Repayment: The terms of your repayment can vary by lender. Check before you apply to see whether you'll need to start making payments now or if you can defer them until after your child graduates. Also, you may be able to secure a shorter or longer repayment term than the 10-year standard with federal loans. Depending on the lender, repayment terms can range from five to 20 years. Most private lenders don't offer income-driven repayment plans.
  • Other benefits: Private student loans aren't eligible for federal loan benefits. But some lenders may offer select perks to borrowers, such as interest rate discounts, unemployment protection, reduced rates on other loans and more.

How to Decide Which Parent Student Loan Is the Right Choice

Depending on your situation, you may qualify for both types of parent student loans, just one or neither. Here's what to consider as you're deciding which option is the better choice for you and your child.

Credit Score

The most important deciding factor between the two is your credit score. If you have poor to fair credit scores and a credit report free of any of the negative events that could stop you from qualifying, Parent PLUS loans may be the better option.

A low credit score may disqualify you from being approved for a private student loan. Even if you can get approved, you'd likely be charged a high interest rate, which may make a private loan more expensive than a federal one.

If you have good or excellent credit, more favorable financing terms could be available through a private lender. Take some time to shop around and get prequalified with multiple lenders to see what your options are.

Repayment Strategy

If you want to wait until your child leaves school to start making payments, that option is available with Parent PLUS loans and some private student loans. With private lenders, however, you'll need to double-check before you apply to make sure that's an option.

If you'd rather start making payments now, you can do that with either option.

Also, remember that the standard repayment term on a federal loan is 10 years. If you would prefer a shorter or longer term, consider a private lender instead.

Interest Rate

Loans with variable interest rates can present more risk for borrowers than those with fixed rates. If you have plans to quickly pay off your student loan debt—which reduces the chance that interest rates will rise too much—you could save money by opting for a variable rate.

However, if you prefer the certainty of a fixed interest rate, you can go with either option.

Forgiveness and Other Benefits

Only federal student loans qualify for the public service loan forgiveness program, so if you work in public service and plan to do so for at least 10 years, Parent PLUS loans could save you money. If you face financial hardship in your future, you can take advantage of the ICR plan. Also, the federal government's forbearance and deferment options may be more appealing.

How Do Parent Student Loans Impact Credit?

Whether you borrow money from the federal government or a private student lender, the impact student loans have on your credit is mostly the same. The only difference is that private lenders will run a hard inquiry on your credit report to assess your creditworthiness, which can temporarily decrease your credit score by a few points.

Either way, parent student loans can represent large debts. Mismanaging either type of loan could have serious credit consequences. To maintain your credit scores, it's crucial that you make your payments on time every month. If you can't, reach out to your lender for some solutions to try to avoid a negative mark on your credit report.

Also, keep in mind that if you cosign a student loan with your child, it can have the same impact on both your and their credit histories if they miss a payment.

On the flip side, if you make all your payments on time, it can help improve your credit score over time.

Finally, once your child graduates, you will have the option to refinance the loans in their name and shift responsibility to them. Keep in mind, though, that both you and your child must be on board to transfer the debt.

Building Credit Can Improve Your Options

If you have time before you need to apply for a parent student loan—or if you don't but plan to borrow for future academic periods—improving your credit score can help you qualify for more favorable terms with private loans, giving you a better chance to save money.

Start by checking your credit score and credit report to see where you stand. Your credit report will give you the information you need to understand where to focus your efforts as it alerts you to the risk factors helping and hurting your credit score. For example, it may help you realize late payments in your past or high credit card balances are affecting your scores, and encourage you to be more vigilant in the future.

Building credit can take time, but the potential savings can be more than worth the effort it takes to get there.