Parent PLUS Loans vs. Private Student Loans: Compare Your Options

Parent student loans can bridge the funding gap for children, but each comes with advantages and drawbacks.

Federal vs. Private Parent Student Loans

Parent PLUS loan interest rates do not depend on an applicant’s creditworthiness. (Getty Images)

Parents who want to help their children pay for college may have invested in a 529 college savings plan or reviewed a school's financial aid package. But often, the total cost of attendance – not just tuition, but also books and room and board – isn't fully covered by savings or financial aid.

In some cases, parents may consider borrowing student loans on their child's behalf to bridge the financing gap. There are two primary college borrowing options for parents: federal Parent PLUS Loans and private student loans.

About 3.7 million borrowers have federal Parent PLUS Loans, with an outstanding balance of $104.8 billion as of the first quarter of 2022, according to the U.S. Department of Education. That doesn't even include parent student loans that are offered by private banks and lenders rather than the federal government.

If you're trying to decide whether you should borrow federal or private loans on behalf of your college student, here are a few key differences to consider:

  • Parent PLUS Loan interest rates and fees are set by the Education Department, based on when the loan is originated. PLUS Loans have the highest rates of any type of federal student loan.
  • Private parent loan interest rates can be fixed or variable and are based on the borrower's creditworthiness. Private loans may offer lower rates than federal PLUS Loans for well-qualified applicants.
  • Parent PLUS Loans have federal protections, such as in-school deferment and student loan consolidation to achieve income-contingent repayment. They may also be eligible for Public Service Loan Forgiveness.
  • Private loans aren't eligible for income-driven repayment or federal student loan forgiveness programs. Private lenders may have their own hardship programs, like forbearance or deferment.

Federal vs. Private Parent Student Loans

Parent PLUS Loans

Private Student Loans

Interest Type

Fixed

Fixed or variable

Interest Rate

7.54%*

Fixed rates from 2.99%**

Variable rates from 0.94%**

Loan Origination Fee

4.228%*

Varies by lender

Loan Repayment Term

10 to 25 years

5 to 20 years

Borrowing Limits

Up to the school's cost of attendance minus federal financial aid

Up to school's cost of attendance; some lenders have set limits

Credit Requirements

No recent derogatory marks like foreclosure or bankruptcy

Good credit (mid-600s) or well-qualified co-signer

Degree Type

Can only be used for undergraduate

Can be used for undergraduate or advanced degree

Option to Co-sign With Student

No

Yes

*Federal student loan rates and fees for the 2022-23 academic year.

**Depending on loan terms and creditworthiness. Includes autopay discount.

How to Decide Between a Parent PLUS Loan and a Private Student Loan

There's no one-size-fits-all college borrowing solution for parents. The best type of parent student loan will depend on your household's unique financial situation.

First, you should thoroughly read your child's financial aid award letter, which outlines the total cost of attendance and any federal loans or grants he or she will receive. You'll also need to consider your own credit score and income, as well as your ability to afford the monthly student loan payments.

The factors below may help guide you in choosing between a federal or private parent loan.

When to Choose a Parent PLUS Loan

  • You have fair credit. Since federal PLUS loan interest rates depend on when the loan is borrowed – and not the applicant's creditworthiness – a poor credit score won't result in higher rates. However, you will need to prove that you don't have an adverse credit history, like a recent foreclosure or bankruptcy.
  • You plan to use federal protections. While Parent PLUS Loans aren't eligible for income-driven repayment plans on their own, you may be able to qualify by consolidating into a new federal student loan. Direct Consolidation Loans can be repaid under an income-contingent repayment plan.
  • You're a public servant or nonprofit worker. If you borrowed a Parent PLUS Loan on behalf of your child, you may still be eligible for the Public Service Loan Forgiveness program, or PSLF. Eligibility is based on the borrower's qualifying employer rather than the student's employer.

When to Choose a Private Student Loan

  • You have very good or excellent credit. Private parent loan interest rates are based in part on the applicant's creditworthiness. Parents with excellent credit and a low debt-to-income ratio will qualify for the lowest student loan rates available – which may be much better than Parent PLUS Loan rates.
  • You want a variable interest rate. Whereas Parent PLUS Loan rates are fixed for the life of the loan, private loan rates can be fixed or variable. You may want to choose a variable rate if you plan on repaying the loan quickly while rates are low, but variable rates come with the risk that your monthly payment will rise over time.
  • You want a shorter loan repayment period. Federal parent loans come with a standard 10-year repayment period, but private parent loans can be repaid in as little as five years. A shorter loan length leads to lower borrowing costs over time, since you're making fewer interest payments.

Compare Federal and Private Student Loan Costs

Repaying a $10,000 Parent Student Loan

Repayment TermInterest Rate*Loan FeeMonthly PaymentInterest Costs
Federal Parent PLUS Loan10 Years7.54%$423$119$4,269
Short-Term Private Loan5 Years4.24%As low as $0$185$1,115
Mid-Term Private Loan10 Years5.54%As low as $0$109$3,047
Long-Term Private Loan15 Years6.94%As low as $0$90$6,149

*Estimated private student loan interest rate based on good credit.

Alternatives to Parent Student Loans

While many parents borrow student loans on behalf of their children, it might not be the right strategy for your unique needs. Paying for your child's college may make it more difficult for you to save for retirement, invest in your future net worth or improve your own financial situation. Here are a few alternatives to borrowing parent student loans:

Be a Co-signer for Your Child's Student Loans

When borrowing a parent student loan, you'll be solely responsible for repaying this debt. In other words, your child would have no legal obligation to help you repay the debt, and you'll be the only party required to make the monthly payments.

You might instead consider having your child apply for her or his own private student loan, with you as a co-signer. This can help your dependent qualify for a private student loan with more favorable borrowing terms, such as a lower interest rate. It means that both parties are responsible for repaying the debt, not just the parent. In the long run, acting as a student loan co-signer could also help your child build a better credit history.

If your child has been making consistent on-time student loan payments, you could be removed as a co-signer from the loan. Known as a co-signer release, this would eliminate your financial obligation on the loan.

Pay out of Your Income or Savings

The vast majority of families – 85% of them – rely on parent income and savings to pay for college, according to Sallie Mae. If you have the cash necessary to help your child cover college expenses, this option is a better financial alternative than taking out student loan debt in your own name.

By tapping into a college savings fund, you'll avoid paying the interest and fees charged by student loan lenders. It also ensures you don't add an extra debt payment to your monthly budget. Just make sure you don't drain your retirement nest egg or emergency fund to pay for your child's college.

Opt for a More Affordable Schooling Option

For some families, the right solution may be to cut college costs rather than borrow more money. You should exhaust all of your options for grants and scholarships, in addition to considering these strategies:

  • Start your child off at a community college. Many states offer low-cost or tuition-free community college for certain students. Some even offer two-year community college paths that guarantee students admission into an in-state public school if they meet select requirements. As a bonus, your child may be able to live at home during enrollment, which can cut down on overall housing and food costs.
  • Find a lower-cost school. Opting for a public school over a more expensive private college may help set your student up for financial stability after graduation.The average cost of tuition and fees at a ranked private college was $38,185 for the 2021-22 academic year, according to a U.S. News analysis. In comparison, annual public college costs at ranked schools were $10,388 for in-state students and $22,698 for those out of state.
  • Encourage a part-time job or work-study program. With the rising cost of college, it's not likely that your child will be able to pay the way through college with a part-time job alone. But earning even a modest paycheck can certainly make a dent in overall expenses, and a work-study program can help your student make connections within a field that can last well into a professional career.

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