As a parent, it’s natural to want to help your child succeed, and Parent PLUS Loans can be a good way to do that. But helping your child pay for college using student loans can have an impact on your own finances, including your credit history.
You may be wondering, then, how utilizing a Parent PLUS Loan might affect your credit. The answer depends on how you manage your payments.
Here’s what you need to know about the Parent PLUS Loan impact on your credit score to keep your finances in good shape.
What Are Parent PLUS Loans?
Parent PLUS Loans are a type of federal student loan specifically designed for parents. Biological and adoptive parents — but not legal guardians — can take out Parent PLUS Loans to pay for a child’s undergraduate education. Unlike other federal student loans, there is no maximum on how much you can borrow with PLUS Loans, so you can borrow enough to cover the total cost of attendance for all of your children.
To qualify for Parent PLUS Loans, you must complete the Free Application for Federal Student Aid (FAFSA).
Do Parent PLUS Loans Impact Your Credit?
The short answer is yes. Parent PLUS Loans function like any other type of credit. Here are a few different ways parent loans influence your credit history.
Parent PLUS Loan Credit Check
Parent PLUS Loan Credit Check
Unlike other federal student loans, there is a Parent PLUS Loan credit check when you first apply. The Department of Education won’t review your credit score, but it will check your credit reports for certain negative items. As long as you don’t have any, you’re likely to be approved.
This upfront credit check can result in a hard inquiry on your credit reports, which can temporarily cause your credit score to dip. But according to FICO, each additional hard inquiry typically knocks fewer than five points off your credit score, and they don’t impact your credit score at all after 12 months.
Opening a New Credit Account
When you receive a Parent PLUS Loan, a new tradeline will be added to your credit reports with the account balance, monthly payment amount, and other details.
One of the factors that goes into your FICO credit score is your length of credit history, which includes your average age of accounts. When you open a new account, it lowers the average age of all of your accounts, which can have a temporary negative impact on your credit score.
But as long as you don’t open multiple credit accounts in a short period, this likely won’t hurt your credit much. Plus, the account’s age will increase over time, which can help improve your credit score in the long run.
Monthly Payments
As with any other form of credit, you must make your Parent PLUS Loan payments on time. If you pay on time, you can avoid late fees and negative credit consequences. However, if you miss a payment by more than 30 days, the loan servicer will typically report it to the credit reporting agencies, causing your credit score to drop.
Because payment history is the most influential factor in your FICO credit score, a missed payment can cause significant damage, and the longer it remains unpaid, the more your credit score will suffer.
Is the Impact on Your Credit Score Worth It for a Parent PLUS Loan?
Parent PLUS Loans can impact your credit score, but as long as you use the debt responsibly, you likely don’t need to worry about anything negative in the long run.
That said, there are other reasons to consider avoiding Parent PLUS Loans. For starters, Parent PLUS Loans carry a higher interest rate and loan fee than undergraduate student loans. If your child hasn’t exhausted their allotment of federal student loans, encourage them to apply first.
Second, because the loan and its monthly payment will appear on your credit reports, that payment will be included in your debt-to-income ratio. If that ratio is too high, getting approved for other forms of credit can make it difficult, particularly a mortgage loan.
Finally, as a parent, you likely have other pressing financial needs, especially if you’re nearing retirement age. If taking out Parent PLUS Loans and making those payments threaten your ability to retire, it might be better to encourage your child to take on student loans in their name instead.
Alternatives to Parent PLUS Loans
Although Parent PLUS Loans can be a valuable tool for parents wanting to help their children with their education expenses, they are a relatively expensive form of debt.
Parent PLUS Loans have the highest interest rate of all federal loans; PLUS loans issued between July 1, 2023, and July 1, 2024, have a rate of 8.05%. And they also have hefty disbursement fees; currently, the fee is 4.228% of the loan amount.
With those factors in mind, there may be other options that are more cost-effective, including these Parent PLUS Loan alternatives:
- Federal Direct Subsidized or Unsubsidized Loans: Federal student loans for undergraduate students have lower rates than Parent PLUS Loans. While Parent PLUS Loans have a rate of 8.05%, the rate for undergraduate loans is just 5.50%. Plus, the loans are solely in your child’s name, so they won’t impact your credit or debt-to-income ratio. Even if you help your child with payments, federal undergraduate loans could be a smart way to save money.
- Co-Signed Private Undergraduate Loans: If your child reaches the annual or aggregate maximum for federal undergraduate loans, they can apply for private student loans. As a college student, they will likely need a co-signer to qualify for a loan. By co-signing, you improve your child’s odds of qualifying for a loan with a competitive rate, but your child is still the primary borrower.
- Private Parent Student Loans: Private parent student loans may be a less expensive form of debt than PLUS Loans for parents with good to excellent credit. ELFI’s private student loans for parents have fixed rates as low as 4.48% and variable rates as low as 4.73%. Those rates are significantly lower than those for Parent PLUS Loans, so you may save money by opting for a private loan.
Read more: Parent PLUS Loan vs. private loans
How Does Your Credit Score Impact Getting a Parent PLUS Loan?
Although the Department of Education doesn’t look at your exact credit score when evaluating your eligibility for a Parent PLUS Loan, it performs a hard credit inquiry and reviews your credit reports. The Department of Education wants to ensure that borrowers don’t have an adverse credit history; for PLUS Loans, you have an adverse credit history if you have one of the following elements on your credit reports:
- You have one or more credit accounts with a total combined outstanding balance higher than $2,085 that is 90 days or more delinquent as of the date of the credit report.
- You have one or more credit accounts with a combined outstanding balance higher than $2,085 that has been placed in collections or charged off during the two years preceding the credit report’s review date.
- During the five years preceding the credit report’s review date, you were subject to one of the following:
- Credit default determination
- Discharge of debts in bankruptcy
- Foreclosure
- Repossession
- Tax lien
- Wage garnishment,
- Write-off of a federal student aid debt
If you have an adverse credit history as determined by the Department of Education, they will deny your application. You may be able to appeal the decision, or you may be able to qualify for a loan by adding an endorser — which acts like a cosigner for the loan — and completing credit counseling.
Repay Your Student Loans Faster Through Refinancing
If you already have Parent PLUS Loans and you’re looking for a way to pay them down more quickly, refinancing the loans with a private lender can help you achieve your goal.
Parent loan refinancing involves replacing one or more existing parent student loans with a new one. Depending on your situation, you may qualify for a lower interest rate. If that’s the case, any additional payments will chip away at the principal more quickly, helping you pay off Parent PLUS Loans faster.
You may also be able to get more flexibility with your repayment plan. For example, ELFI offers parent loan refinancing repayment terms ranging from five to 10 years. If you have the budget for larger payments, opting for a shorter term could help you maximize your savings.
Refinancing could also allow you to transfer your Parent PLUS Loan debt to your child after they’ve graduated from college. To do so will require their consent, and they’ll need to meet the lender’s creditworthiness criteria. But if they succeed, it can be an excellent way to offload that responsibility, so you can focus on other important financial goals.
