Parent PLUS Loans or Cosigning Private Student Loans to Pay for College

Updated November 13, 2020

It’s no secret that paying for college and graduate school can be expensive. Along with purchasing a home, receiving a degree or two from a higher education institution can be one of the most costly (yet rewarding) financial steps of a person’s life. For most traditional college students, this decision is made at an age where the magnitude of the financial implications is too abstract to grasp.  

Many students begin college around 18 years old, and with the estimated average yearly tuition cost totaling $32,889 per year, funding often requires assistance in the form of student loans. Some students take out loans in their own names to pay back after graduation, but since annual loan limits in the federal program have not increased proportionately with rising tuition rates at many four-year colleges, parents often choose to help their children fill the financial aid gap with loans designed especially to supplement additional education costs. 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?

Cosigning Private Student Loans

Cosigning student loans makes both the parent and the child mutually responsible for repayment. While a student does not need a cosigner to qualify for most federal loans, having a parent cosigner increases the chances of being approved for private loans needed to meet the total cost of attendance. The parent is not solely responsible for the loan, but if the child defaults or fails to make timely payments, the parents are required to take responsibility or risk damaging their credit score. Some experts caution parents against cosigning student loans, but in some cases it may be necessary in order for the child to be approved by private lenders.

In some cases, private student loans may be a better option than Parent PLUS loans. Private student loans often offer lower interest rates than Parent PLUS loans, as well as the option to choose between variable and fixed-rate student loans. Additionally, after the student has graduated, a parent can refinance the loan to their student as a means of cosigner release.

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 a better fit for you.

Parent PLUS Loans

A Parent PLUS Loan is simply a federal education loan taken out by parents to help pay for their child’s tuition. What makes it different from other student loans is that the parent assumes complete financial responsibility for the loan. In other words, if the payments are not made on time, it affects the parent’s credit score.

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. PLUS loans typically involve higher interest rates and fees than Direct Loans, and there is no grace period — the repayment process begins as soon as the final disbursement is made. 

Additionally, Parent PLUS loans are not eligible for most income-driven repayment plans, so it can be difficult to decrease your minimum monthly payment on this type of loan.

Parent PLUS Loans are available to the parents of dependent undergraduate students and offer one way to curtail the amount of debt that the child accumulates.

Parent PLUS Loans vs Private Student Loans: Which Should I 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.

Both Parent PLUS Loans and cosigning a student loan carry varying degrees of financial risk, and both are options for parents who want to make sure their child is not taking on too much debt. 

However, remember that parents can always help pay for lower-cost loans that are solely in their child’s name, which may save everyone money. Ultimately, it is a personal choice that depends on the financial situation and preferences of the family.

Refinancing Parent PLUS & 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 both you and your student is to make a post-graduation financial plan.

After graduation, you may choose to consider student loan refinancing. This option could both lower your interest rate and enable you to transition responsibility for the loan to the student.

Explore the Parent PLUS Loan refinancing options available to you with ELFI.* With competitive interest rates and top-quality Personal Loan 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.