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Private student loans vs. Parent PLUS Loans: Which is better for you?

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Private student loans vs. Parent PLUS Loans: Both allow you to help your child pay for higher education. (Shutterstock)

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

The federal government offers Parent PLUS Loans and they come with 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 main differences between the two types of loans to help you figure out which one may be right for you.

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

Parent PLUS Loans vs. private parent loans

Both Parent PLUS Loans and private parent loans give you the opportunity to borrow money for your child’s higher education expenses. But they differ significantly in how interest rates are set and how you’ll 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 generally apply for these loans online through the StudentAid.gov website. In most cases, you won’t qualify if you have an adverse credit history, like a bankruptcy or foreclosure in 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%. That means the interest rate won’t change for as long as you have the loan.

You’re able to borrow up to the full cost of attendance, as determined by your child’s school, minus any other financial aid the student receives. When you take out the loan, you’ll also pay a fee of 4.228% of the loan amount. To pay the fee, the government will deduct a portion of the funds from each loan payout.

Private parent loans

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 may find private parent loans with fixed or variable rates. Variable-rate loans typically begin with a lower APR, but this rate can rise over time. Fixed-rate loans don’t change for as long as you have the loan.

You usually have the option to make full principal and interest payments while your child is in school, or you can make interest-only payments to keep the interest from building up. 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 feature zero loan fees. Just like with Parent PLUS Loans, you’re solely responsible for repaying a private parent loan.

Cosigned student loans

A third option for helping your child pay for their college education is by cosigning their student loan. When you do this, your child is the primary borrower on the loan but you are agreeing to be responsible for repaying the loan if your child defaults.

You may consider cosigning a private student loan with your child. In many cases, students aren’t able to qualify for a loan on their own since they may have little or no credit history. By cosigning, lenders take your credit into account as well. Any missed payments will hurt both your credit and your child’s. Many lenders offer a cosigner release option, which allows you to remove yourself from the loan once your child has made a certain number of consecutive, on-time payments.

A cosigner usually isn’t required on federal student loans.

If you need to take out private student loans, visit Credible to 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 the most sense if you have fair credit. With these federal loans, the interest rate is the same no matter your credit score. If you don’t have any major credit problems, but your score simply isn’t the best, you may get a lower rate on a Parent PLUS Loan than you would 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 the government offers:

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

If your payments are still too high, you may have the option to combine all the Parent PLUS Loans you have into a federal Direct Consolidation Loan, which gives you the option of enrolling in an income-driven repayment (IDR) plan. 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 their scholarship, grant, and federal loan options, and if you have excellent credit, a private parent student loan may make the most sense. You’ll likely be able to qualify for a lower rate than what you’d receive with a Parent PLUS Loan, saving you money in interest.

Private loans may also make sense if you’d like to choose a variable interest rate. This option gives you a lower initial rate, although it can rise over time. If you expect to pay off the loan quickly, though, you may be able to keep the lower interest rate and pay off the loan before it rises.

Similarly, private loans may 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 more quickly.

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

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