Parent PLUS Loan Or A Private Loan?

There are many options available for financing a university degree, and two of the most common are Parent Plus loans and private loans.

Parent PLUS loans are government loans through which parents can help pay for their child’s college education. 

For Parent PLUS loans, the parent is the primary borrower and the federal government acts as the lender. 

These specific loans involve fixed interest rates that are slightly higher than other options but deliver the ability to finance the total cost of an educational program. 

It’s advisable not to borrow more than the total cost. 

By comparison, with private parent student loans, loans are often available at a lower interest rate, but the student doesn’t get the advantage of federal benefits like income-driven repayment plans or loan forgiveness for public service. 

Private financial institutions such as banks and credit unions offer these loans, enabling either the parent or the student to be the primary borrower. 

A parent can also be a co-signer on the student’s private loan. Interest rates for private loans are available in fixed and variable options and normally depend on the borrower's creditworthiness

Read on to understand the key differentiators before making a college financing decision.

How To Decide?

Parents need to be aware of the differences, benefits, and drawbacks of the available options. Below are some of the factors to be considered before deciding which loan to take out for a child’s education.

Who Is Responsible For The Debt?

Of both the loan types, the biggest difference is who’ll be responsible for repaying the debt. 

• The Parents PLUS loans debt has to be paid by the parents whereas the private loan can also be paid by the students.
• Students who don’t have the credit score or enough income to qualify for the private loan on their own are normally required to add a co-signer (mostly a parent) by a private lender. This arrangement means the co-signer is equally responsible to repay the debt like the primary borrower.
• The parents should decide wisely for either loan type, choosing the appropriate loan type based on the family’s financial situation. 
• While it’s easier to get a Parent PLUS loan, private loans offer low-interest rates and fees.

Understand Eligibility

The eligibility requirements for the federal loans are less stringent when compared to a private loan. 

• Parent PLUS Loans are available to anyone who qualifies for federal financial aid.
• To qualify for federal eligibility, the student needs to be enrolled in school for a minimum of half the time. The student shouldn’t have an adverse credit history.
• The eligibility criteria for private loan lenders are very strict. They offer loans mostly for high credit scores and income. For students or families who don’t have a strong credit score, a PLUS loan is likely the preferable loan option.

What Are The Interest Rates?

If the cost of the loan is your primary concern, take a clear look at the interest rates and fees.

• After July 1, 2017, the interest rate for a Parent PLUS loan is fixed at 7.00% with an additional origination fee of 4.264%
• The interest rates and fees for a private loan vary by lender. The interest rates are either fixed or variable depending on the terms. 
• The interest rates mostly depend on the credit score and income of the applicant. The stronger the credit score, the lower the interest rate.
• For example, CommonBond offers a private loan with an interest rate ranging between 3.07% to 9.21%. As of October 2017, Citizens Bank offers interest rates ranging between 3.14% and 11.99%

Explore Repayment Options

Simply put, the lower the interest rate, the easier it is to repay the loan, but the interest rate isn’t everything and other repayment options also have to be taken into consideration.

The repayment plans for a Parent PLUS loan include:

• The Standard term is 10 years, while the Graduated Repayment term can extend up to 30 years.
• The Extended Repayment Plan is either a fixed or graduated payment for 25 years.
• Income-Contingent Repayment requires consolidation. However, the payments are capped at 20% of discretionary income and extend beyond 25 years. 
• For private loans, repayment plans vary by lender. Some lenders offer flexible repayment options that include deferment and forbearance as well. 

Bottom Line

Choose the correct loan type if you need to pay more money for your child’s education. While it’s easy to obtain approval for PLUS loans, the interest rates and fees for the private options are likely to be lower for creditworthy borrowers. 

After comparing the available options, make sure to build a comprehensive plan and decide who’ll be responsible for paying the debt. 

With these factors decided, you’ll be abundantly more prepared to finance a degree comfortably.