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This article first appeared on the Credible blog.
If you’re like most parents, you want to help your child with the cost of college. But if you need to borrow money to cover the full cost, which is the better option for you: federal Parent PLUS Loans or parent private student loans?
Parent PLUS Loans have the highest interest rate and fees of any federal student loan, but you can borrow up to the total cost of attendance for your child’s program (just don’t borrow more than you need or can afford to pay back).
With parent private student loans, you may be able to get a lower interest rate than you would with PLUS loans, but you can’t take advantage of federal benefits like income-driven repayment (IDR) plans or Public Service Loan Forgiveness (PSLF).
If you can’t decide between the two loan types, here’s a breakdown of common scenarios:
Use Parent PLUS Loans if you intend to pursue PSLF or take advantage of an IDR plan.
Use parent private student loans if you have good credit and can qualify for a lower interest rate.
Use parent private student loans if you’d prefer a loan with a variable interest rate.
If you’re looking for private loans, Credible makes it easy to compare private student loan rates from various lenders in minutes.
Parent PLUS Loans vs. parent private student loans
Comparing Parent PLUS Loans and private student loans
Despite college costs skyrocketing in recent years, borrowing limits on most federal loans — like Direct Subsidized and Unsubsidized Loans — haven’t increased in over a decade. As a result, more parents and graduate students are turning to PLUS loans because they can borrow up to the total cost of attendance, filling the gap left by the strict borrowing limits.
However, Parent PLUS Loans have significant downsides which can make private student loans a viable alternative:
Interest rates: Loans disbursed on or after July 1, 2021, and before July 1, 2022, have an interest rate of 6.28%. But if you have good credit and stable income (or a cosigner with good credit), you could qualify for a much lower interest rate on a private loan, helping them save money.
Fees: Loans disbursed on or after July 1, 2021, and before July 1, 2022, have a disbursement fee of 4.228%. This fee is deducted from the loan amount, so the amount of money you’ll receive is less than you actually borrowed. But Credible’s private student loan partners don’t charge any application, origination, or disbursement fees.
Payments: With Parent PLUS Loans, payments are due as soon as the loan is disbursed, even while your child is in school. Borrowers can opt to defer payments until after the student graduates, but interest will continue to accrue on the loan. With private student loans, you can choose a repayment option that works best for you. You may defer payments until after graduation, or you can start making payments or interest-only payments while the student is in school to reduce interest charges.
With Credible, you can easily compare private student loan rates from various lenders, and it won’t affect your credit.
How to decide between Parent PLUS Loans and private student loans
When deciding between Parent PLUS Loans and parent private student loans, ask yourself these questions:
What interest rate can I qualify for?
Do I want a variable-rate loan?
Did I complete the FAFSA?
Will I need access to federal benefits?
Am I eligible for PSLF?
1. What interest rate can I qualify for?
If you have good credit and a steady income, parent private student loans may offer more competitive rates.
Parent PLUS Loans: All borrowers who take out a PLUS Loan on or after July 1, 2021, and before July 1, 2022, will have a 6.28% — regardless of their credit. But keep in mind that the upfront fee on PLUS Loans can increase your APR by about a full percentage point.
Private student loans: Private loan borrowers with good to excellent credit and steady income might be able to qualify for a lower rate. Over the length of your loan repayment, that lower interest rate could help you save a significant amount of money.
2. Do I want a variable-rate loan?
If you want to take advantage of a variable-rate loan, opt for a parent private student loan.
Parent PLUS Loans: Federal loans only have fixed interest rates.
Private student loans: By contrast, private student loans can have variable or fixed interest rates. Unlike fixed-rate loans, which have the same interest rate for the entire repayment term, variable-rate loans tend to start off with low interest rates. Over time, the rates can increase and decrease. If you want to aggressively repay the loan, it may make more sense for you to use a variable-rate loan.
3. Did I complete the FAFSA?
If you haven’t completed the FAFSA by its deadline or prefer to not complete it, use a parent private student loan.
Parent PLUS Loans: Parent PLUS Loans are a type of federal loan administered by the U.S. Department of Education. Because it comes from the federal government, you’ll need to make sure you complete a FAFSA first.
Private student loans: Private student loans, on the other hand, don’t require you to fill out the FAFSA. Just remember that your school may have to certify the cost of attendance in order to determine how much you’re eligible for, and try to keep the total amount borrowed in line with what you expect your annual salary to be after graduation.
4. Will I need access to federal benefits?
If you need benefits like deferment and forbearance or IDR plans, apply for Parent PLUS Loans.
Parent PLUS Loans: Federal student loans are eligible for deferments and forbearance, which allow you to postpone making your payments on your loans for a set period of time without becoming delinquent or damaging your credit. While Parent PLUS Loans aren’t eligible for IDR plans as they are, you can consolidate them with a Direct Consolidation Loan. Once you do so, your loans are eligible for Income-Contingent Repayment (ICR) — one of the four IDR plans. By signing up for ICR, you can sometimes reduce your minimum monthly payment. And, after 25 years of making payments, any remaining loan balance can be discharged.
Private student loans: Private student loans aren’t eligible for federal benefits — so if you need these perks, make sure you apply for federal loans.
If you need to apply for a private student loan, Credible makes it easy to see your prequalified private student loan rates, all in one place.
5. Am I eligible for PSLF?
If you work for a not-for-profit organization or government agency, take out Parent PLUS Loans.
Parent PLUS Loans: If you have federal student loans and work for a not-for-profit organization or government agency for 10 years and make 120 qualifying payments — and payments made under an ICR plan count — you can qualify for loan forgiveness under PSLF. Parent PLUS Loans can qualify for PSLF, but you do have to consolidate them with a Direct Consolidation Loan first and sign up for an ICR plan first. Once you do that, your monthly payments will count toward PSLF, helping you pursue loan forgiveness, which can be a substantial relief.
Private student loans: Only federal loans are eligible for PSLF; private student loans don’t qualify.
Cosigning a private student loan as an alternative
If you take out any loan for your child, the only way to remove your obligation on these loans is to transfer them into your child’s name; otherwise, you’re on the hook for the debt for 10 years or more.
Instead, it might make more sense for your child to apply for private student loans in their own name, with you acting as a cosigner on the loan.
Some private student loan lenders also offer cosigner release. After making consecutive, on-time payments for a certain period of time (usually one to four years, depending on the lender), your child can apply to have you removed as a cosigner from the loan — eliminating your responsibility for the loan. This strategy is a good way to help your child get the financing they need to pay for school, without tying yourself to a loan for decades.
The bottom line: If you act as a cosigner, your child is the primary borrower. But with you as the cosigner, they’re more likely to get approved for a loan and qualify for a lower interest rate than they’d get on their own. As they make payments on the loan, they build up their credit history, too.
About the author: Kat Tretina is a freelance writer who covers everything from student loans to personal loans to mortgages. Her work has appeared in publications like the Huffington Post, Money Magazine, MarketWatch, Business Insider, and more.
The post Parent PLUS Loans vs. Private Parent Loans: How to Choose appeared first on Credible.