Private Student Loans vs Parent Plus Loans

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 are 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 Private institutions govern Private Loans.

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

Table of Contents

Private Student Loans vs Parent Plus Loans
Parent PLUS Loans vs Private Loans interest rates comparison
Factors to consider while deciding to purchase these loans
Role of the parent while choosing

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

Basis 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 are required.	Payment is required when at school.
Cosigner requirement	Not required	Mandatory
FAFSA requirement	Mandatory	Not required
Interest-rate reduction	0.25%	Lender’s choice
Tax deduction	Yes	Yes
Loan fees	4.48% for 2019-2020	Lender’s choice
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 up to 3 years.	Lender’s choice
Repayment option	After college program completion	Lender’s choice May provide a few options.
Repayment term	Varies from 10 to 25 years	Changes by the lender from 5 to 25 years
Loan forgiveness	Available for some portion of the 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	Lender’s choice
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 - have a fixed interest rate of 7.08%. The eligibility and terms and conditions are the same as there is one familiar loan provider.

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

Learn more about student loans

Parent PLUS Loans Vs Private Loans Interest Rates Comparison

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 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. Congress sets the interest rates. 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 Loan interest rates

These are the loans that are provided by private institutions, banks, and online lenders. These 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

Academic year	Fixed	Variable
2019-20	Roughly around 3 to 8 %	Roughly around 1 to 12 %

While looking for a private student loan, it is vital to check for the option with the lowest interest rate; 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.

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

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

Which is better? A Private Student Loan or Parent PLUS 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 made with a comparison based on the following -

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 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 Ave	You have an option to make full payments immediately or interest-only payments while the child is still in school.
Citizens One	You have an option to make full payments immediately or interest-only payments while the child is still in school.
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	Repayment of loans happens immediately; you can opt for income-based compensation.
Federal-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 pay additional loan repayments towards the principal amount of the loan. There are also some factors to consider while making a 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.

Advantages and disadvantages of Parent PLUS Loans

Considering the pros and cons of each loan can help you make the right decision. Choosing the correct type of loans can save you money and time in furthering your education.

Pros	Cons
The U.S. Department of Education is the lender	The parent must not have an adverse credit history.
If you have an adverse credit history but meet additional requirements, you may be eligible for a PLUS loan.	It comes along the additional expense of origination fees.
The interest rate is fixed throughout the life of the loan.	Unlike other direct loans, you do not have the advantage of making the repayment after six months of graduation. You have to start making the repayment right away after receiving the entire loan amount.
There are multiple options for payment	Unlike Private Student Loans, you do not enjoy the benefit of the statute of limitations.
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.	Do not subsidize the advantage that the other direct loans have.
Based on some criteria, you can take advantage of income-driven repayment and loan forgiveness.

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 savings for the recovery of a debt in case of non-recovery
You have reserved enough savings for retirement
You have a good credit score

Advantages and disadvantages of Private Student loan

Before opting for Private Student Loans, it is advisable to look into the terms and conditions of different loans provided 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
A credit score of the Cosigner
Payment options and term
Loan fees
Deferment and forbearance options

Pros and cons

To make the right call on the type of loans to choose for your education, be aware of the advantages and disadvantages it has, and what the loan can offer considering your best interest.

Advantages	Disadvantages
You can enjoy the benefit of low-interest rates starting from 2.93% provided if and only if you have a good credit score and credit history. This interest can be lower than the federal interest rate.	Unlike PLUS Loan, you do not have the option of income-driven payment and loan forgiveness.
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.	The variable interest rate does not remain constant throughout the life of the loan. They may get high but not low.
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.	No subsidy benefit, unlike the direct federal loans.
You can enjoy the benefit of the statute of limitations. The law of limitations varies state wise ranging from 3 to 10 years.	A cosigner is mandatory irrespective of your credit score and is legally responsible for your debt.
	The cosigner is responsible in case of the borrower’s death.
	If you fail to repay, the collectors can not only go after them for repayment, but it will also adversely affect their credit score.
	Fewer repayment options.

The role of a Parent while choosing a Student Loan

The parents must also play a significant 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 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 focused entirely on his schooling without being in the pressure of repayment of the 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 concluding. 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.