Private Student Loans vs Parent Plus Loans - Your Guide To Make The Right Decision

When looking to finance your child's education you can choose among a number of loans. One such situation will arise when you are caught between a parent PLUS loan and a private student loan. Make a sound decision by learning about the factors to consider and much more.

Updated by Jason Joy Manoj on 9th December 2019

The parents can opt for two types of loans, which generally are: Federal Parent PLUS Loans and Private Parent Loans. By doing so they ease the pressure of debt their children will have to go through. But among the two loan options which is best suited for the parent?

Both the loans provide financial aid to cover school expenses, though the purpose is the same they differ in many aspects. Both the loans do not have the same terms and conditions. The Parent PLUS Loans are governed by the Federal government whereas the Private Loans are governed by Private institutions.

The parents must have a clear idea of both the loans and the responsibilities that come along with both types. Although we analyze the case of private student loans vs parent PLUS loans it should be noted that both these loans can be used to cover the same educational expenses like books and much more.

Table of Contents

Parent PLUS loan

Parent PLUS loans are a type of PLUS loan which are government loans or federal loans. This kind of loan option is for those parents who want to assist their child in their tuition. These loans have higher interest rates and fees associated with them. The number of repayment plans they qualify is lesser than the other federal loan options like the direct subsidized and unsubsidized loans. 

A parent must consider this loan option after they exhaust their child has exhausted the other federal loan options. Consider this kind of loan option if - 

  • Your credit history isn’t strong enough to qualify for a private student loan with a lower interest rate

  • You are a government employee and plan to pursue the Public Service Loan Forgiveness

Parent Plus Loan interest rates

The interest rates for Parent PLUS loans are fixed, so it is easy to plan your repayment. The interest rates are set by Congress, here is a table showing the interest rates associated with Parent PLUS loans - 

Academic year PLUS loan interest rate PLUS loan fee
2019-20 7.08% 4.24%
2018-19 7.60% 4.25%
2017-18 7.00% 4.26%

In addition to the interest, you will have to pay a substantial loan fee of 4.236% which is deducted proportionally after each loan disbursement. The interest rates as shown in the table keep increasing each month.


Private student loan 

These are the loans that are provided by private institutions, banks, and online lenders. These kinds of loans generally do not have any fees associated with them, unlike the federal PLUS loans.

A private student loan can be a better option if -

  • You have no plans to pursue Public Service Loan Forgiveness.

  • You have a good credit score which can help you qualify for a rate better than those associated with those of parent PLUS loans

While looking for a private student loan it is important to check for the option with the lowest interest rate, in order to qualify for a loan with a low-interest rate you will require a good credit history. You can get a co-signer on board to help strengthen your application for a lower interest rate.

Certain lenders have a pre-qualification process that can help a borrower get a personalized rate without conducting a hard credit pull.


Private student loans Vs Parent PLUS Loans

Let’s start with a quick overview difference between Parent PLUS Loan and Private Student

Loan

BASIS OF COMPARISON
Parent PLUS Loan
Private Student Loan
Borrower Parent of a dependent undergraduate student Parent or student
Provider Federal government
Private organizations like private banks, credit unions
Interest Rate Fixed interest rates, currently for 2019-2020 is 7.08%
Fixed and variable rate options, depending on the lender.
Credit check The parent must not have an adverse credit history
Mandatory check of credit score
Payments required
Until graduation no payments required.
Payment required to be made while in school.
Cosigner requirement
Not required Mandatory
FAFSA requirement
Mandatory Not required
Interest rate reduction on automatic payment
0.25%
Depends on the lender.
Tax deduction Yes Yes
Loan fees 4.48% for 2019-2020
Depends on the lender.
Annual loan limits
Cost of Attendance (COA) minus other student aid
Cost of Attendance (COA) minus other student aid
Deferment / postpone option
Available
Depends on lender
Forbearance option
Available upto 3 years.
Depends on the lender.
Repayment option
After the completion of a college program.
Depends on the lender. May provide few options.
Repayment term Varies from 10 to 25 years
Varies by lender from 5 to 25 years
Loan forgiveness Available for some portion of loan if you work in public services and under certain circumstances
Almost impossible to get. May be possible in certain circumstances
Death discharge Student or parent
Depends on the lender.
Consolidation Yes Yes

From the above table it is clear how the loans differ from each other. Especially how much the private institutions have control over the loans.

For example - 

Parent PLUS Loans has a fixed interest rate of 7.08%. The eligibility and terms and conditions are the same as there is one common loan provider.

Private Student Loans- Citizens one Bank provides both variable as well as fixed interest rate. Under citizen one bank the Fixed interest is 4.40-12.19% and for variable interest rate is 3.29-11.62%. The eligibility differs from lender to lender.


Factors to consider while deciding between Parent PLUS Loan and Private Student Loan?

Sometimes there may be confusion among the students whether to go for  Parent PLUS Loan or Private Student Loan. The most valid and smart choice can be done on the comparison based on the -

1) Total loan cost 

2) Your financial condition.

3) Repayment options available

While getting a loan, it should be noted that you will have additional fees, penalties and other costs incurred during borrowing and repayment of the loan. All these costs add to the total cost of the loan. A borrower's individual financial condition is crucial in finding out which loan is right for you.

Repayment options are crucial for borrowers as they help them during the repayment journey, here is a list of available lenders and the repayment offers offered - 

Lender

Repayment Options

College Avenue

You have an option make full payments immediately or interest only payments while the child is still inschool

Citizens One

You have an option make full payments immediately or interest only payments while the child is still inschool

Wells Fargo

Make interest only payments for 48-months or start full time payments immediately

Sallie Mae

Make interest only payments for 48-months or start full time payments immediately

RISLA

Reapyment of loans happens immediately, you can opt for income based repayment

Fed Plus (US Government)

You can make full payments immediately. With your child still in school you can defer payments

It is advised to check for prepayment penalties as well. Apart from the monthly payments to be made you can make additional payments towards the principal amount of the loan. By doing so you can 

There are also some factors to consider while making the comparison which is discussed next.

Parent PLUS Loans are one of the federal loans but they do not have the same benefits as that of the other federal loans. 


Pros and cons of parent plus loans

There are some pros as well as cons to be considered, they are:

Pros

  1. The U.S. Department of Education is the lender.

  2. If you have an adverse credit history but meet additional requirements you may be eligible for PLUS loan.

  3. The interest rate is fixed throughout the  life of the loan.

  4. There are multiple options for payment.

  5. You can borrow as much as you need. The maximum loan amount receivable is based on the cost of attendance minus any other financial aid received.

  6. Based on some criteria you can take advantage of income-driven repayment and loan forgiveness 

 Cons

  1. The parent must not have an adverse credit history.

  2. It comes along the additional expense of origination fees.

  3. Unlike other direct loans, you do not have the advantage of making the repayment after 6 months of graduation. You have to start making the repayment right away after receiving the entire loan amount.

  4. Unlike private student loans, you do not enjoy the benefit of the statute of limitations.

  5. Do not subsidy advantage that the other direct loans have.

Parent PLUS Loans are not eligible for the following:

  • The parent must not have an adverse credit history.

  • Income-contingent repayment, to avail this benefit it may be consolidated into a Direct Consolidation Loan.

  • Income-based repayment plan

  • Pay as you earn repayment plan

  • Public service loan forgiveness- it must be consolidated into a Direct Consolidation Loan.

  • Parent PLUS Loans have higher origination fees as well as interest rate when compared to other direct loans.

The parents must also take care of the following

  • Your child has taken the maximum advantage of federal student loans.

  • You as a parent have enough saving for the recovery of debt in case of non recovery.

  • You have reserved enough savings for retirement.

  • You have a good credit score.


Private Student loan pros and cons

Before opting for private student loans it is advisable as well as wise to look into the terms and conditions of different loan provides and compare them. As mentioned in the above chart many options depend and vary from lender to lender. The following are the factors to be considered for comparison:

  • Interest rate

  • Student credit score

  • Credit score of the Cosigner 

  • Payment options and term 

  • Loan fees

  • Deferment and forbearance options.

Pros 

  1. You can enjoy the benefit of low-interest rates starting from 2.93% provided if and only if you have good credit score and credit history. This interest can be lower than the federal interest rate.

  2. They also provide higher borrowings based on your degree level and the school fees. If you go to a private school depending solely on federal student loans won't provide sufficient and higher borrowings.

  3. Apart from high borrowings, you can also have the benefit of  borrowing up to 100% of your cost of attendance depending on your degree level.

  4. You can enjoy the benefit of the statute of limitations. The statute of limitation varies state wise ranging from 3 to 10 years.

Cons 

  1. Unlike PLUS Loan you do not have the option of income-driven payment and loan forgiveness.

  2. The variable interest rate does not remain constant throughout the life of the loan. They may get high but not low.

  3. No subsidy benefit unlike the federal direct loans.

  4. A cosigner is mandatory irrespective of your credit score and is legally responsible for your debt.

  5. The cosigner is responsible in case of the borrower’s death.

  6. If case you fail to repay, the collectors can not only go after them for repayment but it will also adversely affect their credit score.

  7. Fewer repayment options.


Learn more about student loans


How to apply for Parent PLUS Loan and Private Student Loan? 

As both the loans are provided by two different lenders the procedure to apply for a loan is also different. The federal loan requires a credit check but need not have a cosigner, whereas in a private student loan, credit check in not only a must but also required to have a cosigner to be eligible.

Apply for Parent PLUS Loans

Firstly you must be eligible to apply for Parent PLUS Loan. The eligibility requirements are:

  1. You must be a parent of a qualified undergraduate, graduate or professional student.

  2. You must have a good credit score and a good credit history.

  3. You have to fulfil the general federal eligibility and requirements.

Apply for Private Student Loans

For Private Student Loans there are no fast and hard rules as in Parent PLUS  loan but there are certain basic requirements to be checked. The eligibility for Private Student Loans are:

  1. No loan can be sanctioned without a cosigner.

  2. Your cosigner must have a good credit score.

  3. You must be a student of a college.


What are the repayment options ?

Both the loans have different options for repayment of the loan. For Parent PLUS Loan repayment begins after the completion of the College whereas for the Private Student Loan repayment begins while the student is still in school. 

Repayment options for Parent PLUS Loan

The following repayment options are available:

  1. Standard repayment plan- the monthly payments maybe slightly high but you will be able to repay in the shortest time possible. The payments are fixed and made upto 10 years. 

  2. Graduated repayment plan - the payment begins with lower interest which gradually increase every 2 years. It is very preferable when you have low income and expect to increase in the upcoming years. The payment are made upto 10 years.

  3. Extended repayment plan - the payment period is extended upto 25 years. If you want to make lower monthly payments for a longer period of time this the right  payment option.

Repayment options for Private Student Loans 

The repayment for the Private student loans begins right after the disbursement of the loan and hence you have to start making the payment while you are still in school. But you can choose one of the following options while you are still in school :

  1. Immediate repayment- after the disbursement of loan you have to start repaying while you are still in school.

  2. Interest-only payment- you have to only pay the interest while you are still in school and the full payment begins after school.

  3. Fixed in-school payment- you make a fixed monthly payment while still in school.

  4. Full deferment - you pay nothing while you are in school but your loan balance keeps increasing as the interest keeps on getting added.

Sometimes there may be confusion among the students whether to go for  Parent PLUS Loan or Private Student Loan. The most valid and smart choice can be done on the comparison based on the total loan cost and your financial condition. 


Learn more about student loan repayment


The role of the parent while choosing Student loan

The parents must also play a major role in guiding their children to decide the most affordable and manageable loan. If the parent wants the child to be responsible and aware of his duties, know the burden of having a debt and how to manage his expenses and make the payments on his own the parent can advise the child to avail Private Student Loan. It will not only make the child responsible but also independent.

If the parent wants the child to be completely focused on his schooling without being in the pressure of repayment of loan the parent can advise the child to avail Parent PLUS Loan

So that the burden of repayment can be transferred to the parent. But the parents must also consider certain factors before coming to the conclusion. The parent must make sure that they earn high or affordable income, their credit scores are good, they do not have any adverse credit history, they have savings to manage not only the loan but also their retirement.