When it comes to paying for college, parents cover a significant portion of the cost. According to the Federal Student Aid Data Center, borrowers owe $111.7 billion in Parent PLUS Loans. Few people can cover the entire cost of their children’s education from their savings, so many parents turn to student loans.
As a parent borrowing for a child pursuing an undergraduate degree, you can use a Parent PLUS Loan or private student loan. Which is best for you depends on several factors, so it’s essential to do your homework before deciding.
Paying for a Child’s Education: Parent PLUS Loan or Private Student Loan
Parents frequently use student loans to cover some or all of their children’s college expenses. But parent student loans can have higher interest rates and stricter repayment terms than loans designed for students, so it’s wise to shop around and compare your options.
Parent PLUS Loans
One of the most common questions parents have is, “Are Parent PLUS Loans federal or private?” Parent PLUS Loans are federal but work differently than other federal loans, which can lead to confusion.
Federal loans for undergraduate students don’t require credit checks, and annual and aggregate borrowing limits exist. By contrast, Parent PLUS Loans require credit checks — they can deny you if you have an adverse credit history — and you can borrow up to the total cost of attendance at your child’s school.
To qualify for a Parent PLUS Loan, you must meet the following requirements:
- You must be a biological or adoptive parent of a student pursuing an undergraduate degree.
- You must be a U.S. citizen or eligible non-resident with a valid Social Security number.
- You must not have an adverse credit history or need an endorser.
- You and your child must complete the Free Application for Federal Student Aid (FAFSA) by federal, state, and school deadlines.
Private Parent Student Loans
Besides Parent PLUS Loans, you can also take out a parent student loan from a private lender. Private parent student loans typically require credit checks with a minimum credit score and income requirements. While each lender will have its respective terms, you can usually borrow up to the total cost of attendance.
Private student loan requirements vary by lender. At ELFI, borrowers must meet the following criteria to qualify for a private parent student loan:
- You must meet ELFI’s qualifying dependent requirements.
- The student must be enrolled at least half-time pursuing a bachelor’s, master’s or doctoral degree.
- Borrowers must be U.S. citizens or permanent residents.
- You must have a credit score of 680 or higher.
- You must have an income of $35,000 or higher.
Private Student Loan vs Parent PLUS Loan: 7 Key Differences
When deciding between a private parent loan versus a Parent PLUS Loan, keep these significant differences in mind
1) Issuer
While the Department of Education issues Parent PLUS Loans, banks, credit unions, or specialty lenders can issue private parent loans.
2) Interest Rate Type
Parent PLUS Loans have fixed interest rates. By contrast, private student loans can have fixed or variable interest rates.
3. Interest Rate
Parent PLUS Loans disbursed on or after July 1, 2024, and before July 1, 2025, have an interest rate of 9.05% APR* (*Annual Percentage Rate) — the highest rate ever for Parent PLUS Loans.
With private parent loans, rates can vary by lender and fluctuate based on market conditions. At ELFI, we offer some of the lowest student loan rates available.
4. Fees
Parent PLUS Loans are subject to disbursement fees. A fee of 4.228% will be deducted from your loan amount before disbursing it to you. If you took out a $20,000 Parent PLUS Loan, the government would deduct $845.60 — 4.228% of the loan amount — and issue you the remaining $19,154.40.
Some lenders charge origination or disbursement fees with private parent loans, but not all do. ELFI, for example, doesn’t charge application, origination, disbursement, or prepayment fees.
5. Repayment Term
The default repayment term for Parent PLUS Loans is ten years. With private loans, you have more flexibility. You can choose a term of five, seven, or ten years, though some lenders offer longer terms.
6. In-School Repayment
Parent PLUS Loans don’t have grace periods, but you can defer payments until your child graduates.
Private parent loans have more options. At ELFI, you can choose between the following repayment plans:
- Immediate: With the immediate repayment plan, you make full principal and interest payments right after disbursement. This option is the most cost-effective with the lowest overall total.
- Interest-Only: By choosing this plan, you’ll only pay the accrued interest while your child is in school. You’ll pay more overall than if you opted for immediate repayment, but it’s less expensive than fixed or deferred repayment.
- Fixed: The fixed repayment plan allows you to pay $25 monthly while your child is in college(1). While you’ll pay more with this option than the immediate or interest-only repayment plans, you’ll cover some of the interest that accrues, making it cheaper than a deferred payment plan.
- Deferred: Choose the deferred payment plan if you don’t want to make payments until your child graduates. Remember that this is the most expensive option of the four repayment plans.
You can use ELFI’s student loan calculator to determine how much you may pay under each repayment plan.*
7. Benefits
Private student loans aren’t eligible for federal loan benefits like income-driven repayment (IDR) plans or Public Service Loan Forgiveness (PSLF).
Parent PLUS Loans aren’t eligible for IDR plans or loan forgiveness in their current state. However, there is an alternative: If you consolidate Parent PLUS Loans with a Direct Consolidation Loan, you can enroll in income-contingent repayment — one of the four IDR plans. If you work for a qualifying non-profit organization or government office, you can also pursue PSLF.
Parent PLUS Loans are also eligible for other federal protections, such as federal forbearance or deferment and closed school discharge.
8. Credit Requirement
With private student loans, you usually need good to excellent credit to qualify for a loan. If your score is below 680, you may need a co-signer.
The requirements for Parent PLUS Loans aren’t as strict. There is a credit check for PLUS Loans, but the lender only looks for an adverse credit history. An adverse credit history means you have the following issues:
- You have more than $2,085 in debt that is delinquent by 90 days or more
- You’ve been subject to a default determination, discharge of debts in bankruptcy, foreclosure, repossession, tax lien, or wage garnishment.
If you don’t have any of those problems, you may qualify for a Parent PLUS Loan even if you have a low credit score or no credit history.
Borrowers with an adverse credit history may qualify for a Parent PLUS Loan if they add a creditworthy co-signer to their applications.
Which Parent Student Loan Is Best for You?
Is a private student loan or a Parent PLUS Loan right for you? There’s no right answer for everyone.
In general, borrowers with excellent credit and reliable incomes may qualify for lower interest rates with private parent loans than federal ones. However, if you think you’ll need to take advantage of federal loan benefits like IDR plans, a Parent PLUS Loan may make more sense for you.
Before applying for either type, do some research and get rate quotes for private parent loans so you can make an informed decision.
When to Choose a Parent PLUS Loan
There are several scenarios where a Parent PLUS Loan is a good choice:
- You have poor to fair credit: If your credit is less-than-perfect — but you haven’t had any issues with bankruptcy or delinquencies — a Parent PLUS loan might be right for you.
- You work in public service: Parent PLUS Loan borrowers that consolidate with a Direct Consolidation Loan and enroll in an income-contingent repayment plan can qualify for federal loan forgiveness programs like Public Service Loan Forgiveness. If you work for a non-profit organization or government office, choosing a Parent PLUS Loan so you can apply for loan forgiveness later can be a smart decision.
- You work in a volatile industry: If you work in a field prone to layoffs, you may want the peace of mind that comes with federal student loans. With federal loans, you can take advantage of federal income-driven repayment plans and federal forbearance programs if you lose your job or experience a reduced income.
When to Choose a Private Loan
By contrast, a private student loan can make sense in the following circumstances:
- You have excellent credit: Depending on your credit and the loan term you choose, you could qualify for a private parent loan with a significantly lower interest rate than the current Parent PLUS Loan rate.
- You want to help your child pay for a master’s or doctoral degree: Parent PLUS Loans are only for parents of undergraduate students; you cannot use PLUS Loans to help your child with their master’s or doctoral degree. Private loans are more flexible, so you can take out a private parent loan to cover the cost of business or medical school.
- You are not the biological or adoptive parent: Parent PLUS Loans are limited to biological and adoptive parents; siblings, aunts and uncles, and grandparents aren’t eligible, even if they’re the legal guardian. If you aren’t a biological or adoptive parent but want to help the child to pay for school, private parent loans can be a helpful alternative.
Get a Private Student Loan With ELFI
Now that you know the difference between Parent PLUS Loans and private parent loans for college, you can decide whether a private loan is right for you. With ELFI’s parent loans, you can choose a loan with varying term options and choose from multiple repayment options when your child is in school. And if you have good credit, you may qualify for a much lower rate than with a Parent PLUS Loan.
