It’s no secret that paying for college and graduate school can be expensive. Besides buying a home, earning a degree is one of the most costly (yet rewarding) steps in a person’s life.
Most students enter college when they are 18 or 19 years old. They likely have never worked full-time before, nor have they established their credit histories yet. Those issues, combined with the high cost of tuition — the national average for the 2023-2024 academic year being $28,961 for public universities and $42,162 for private schools — many need their parents’ help to take out loans and pay for college.
Parent PLUS loans or cosigning a private student loan are the top two options for parents looking to help fund a child’s college education – but what is the difference, and which is right for you?
What’s the Difference Between a Parent PLUS Loan and Cosigning a Private Student Loan?
Federal student loans don’t require cosigners, but most college students will need them for private loans. Approximately 93% of undergraduate student loans were cosigned for the current academic year.
Why is that number so high? Private lenders have minimum income and credit requirements, and college students are unlikely to meet those requirements. If the student isn’t eligible for a loan by themself, they may qualify with a parent cosigner if their parent meets the following criteria:
- An annual income of $35,000 or higher
- A credit score of 680 or better
- At least 36 months of credit history
When a parent cosigns the loan, they share responsibility for its repayment. If the child defaults or fails to make timely payments, the parent must make payments or risk damage to their credit. Some experts caution parents against cosigning student loans. However, it may be necessary if the student needs additional funding and cannot qualify for a loan based on their income or credit.
In some cases, private student loans may be a better option than Parent PLUS loans. Private student loans may offer lower interest rates than Parent PLUS loans and the chance to choose between variable and fixed-rate student loans.
Once students have graduated and work full-time, they may be eligible for student loan refinancing. Refinancing the loan would allow them to release the cosigner from the loan, and they’d take over sole responsibility for its repayment.
On the other hand, private student loans do not offer all the same borrower protections as federal student loans. If you’re interested in pursuing federal loan benefits, then a Parent PLUS loan may be better for you.
If you plan on cosigning a loan for a child, be sure you are both clear on the loan’s repayment terms and who is responsible for the monthly payments.
Parent PLUS Loans
A Parent PLUS Loan is a type of federal loan specifically for parents who want to borrow money to pay for their child’s undergraduate education. To qualify for a Parent PLUS Loan, parents must meet the following requirements:
- The borrower must be the biological or adoptive parent (legal guardians and other relatives are not eligible)
- The parent must complete the Free Application for Federal Student Aid (FAFSA)
- The parent must not have an adverse credit history, meaning they cannot have a history of recent bankruptcies, foreclosures or repossessions.
Unlike cosigned private loans, Parent PLUS Loans are solely the parent’s responsibility; the child has no legal obligation to pay the loan.
While some parents may be eager to help foot the bill for their child’s education, it is recommended to take advantage of Direct Loans first before taking out a Parent PLUS Loan. since PLUS loans typically have higher interest rates and fewer repayment options than Direct Loans.
Interest PLUS Loans issued between July 1, 2023, and July 1, 2024, have an interest rate of 8.05% and a disbursement fee of 4.228%. By contrast, private student loans have rates as low as 4.48% and typically have no disbursement fees.
As a federal loan, PLUS Loans are eligible for protections and benefits, but taking advantage of those perks can take longer. For example, Parent PLUS Loan borrowers aren’t eligible for Public Service Loan Forgiveness and Income-Driven Repayment (IDR) plans with the loans in their current state. Borrowers can become eligible by consolidating their PLUS Loans with Direct Consolidation Loan. Afterward, they will be eligible for the income-contingent repayment plan and forgiveness programs.
How Do You Choose?
If you are a parent considering ways to help your child pay for college, it is crucial to understand both options’ differences and financial implications. While unlikely to occur, it’s also important to consider who would become responsible for either type of loan in the case of an unexpected death.
Parent PLUS Loans and cosigning a student loan carry varying degrees of financial risk, and both are options for parents who want to ensure their child is not taking on too much debt.
Parent PLUS Loans, like federal loans, have more borrower protections than private loans. But they also have the highest rates and fees of any federal loan, and the parent is solely responsible for their repayment.
However, remember that parents can always help pay for lower-cost loans solely in their child’s name, such as federal Direct Loans, which may save everyone money. Ultimately, it is a personal choice that depends on the financial situation and preferences of the family.
Refinancing Federal & Private Student Loans
Whether you’ve taken out a Parent PLUS Loan or a private student loan, one of the best ways to ensure financial success for you and your student is to make a post-graduation financial plan. Then after graduation, if you want to adjust your repayment plan, consider student loan refinancing. This option could lower your interest rate and enable you to transition responsibility for the loan to the student.
Explore the refinancing options available to you with ELFI. With competitive interest rates and top-quality StudentLoan Advisors, refinancing may offer a faster route to financial freedom. Learn how to refinance Parent PLUS Loans and decide whether it’s right for you.
