Private Student Loans vs Parent Plus Loans: What’s the Difference?October 26, 2021
When it comes to paying for college, parents do most of the heavy lifting. According to Nerdwallet, Parent Plus Loan debt now towers just above $103 billion. 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 on behalf of a child pursuing an undergraduate degree, you can use a Parent PLUS Loan or private student loan. Which is best for you is dependent on several factors, so it’s important to do your homework before making a decision.
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 they work differently than other federal loans, which can lead to some confusion.
Federal loans meant for undergraduate students don’t require credit checks, and there are annual and aggregate borrowing limits. By contrast, Parent PLUS Loans require credit checks — you can be denied if you have an adverse credit history — and you can borrow up to the total cost of attendance at your child’s school.
Private Parent Student Loans
Besides Parent PLUS Loans, you also have the option of taking out a parent student loan from a private lender. Private parent student loans require credit checks and typically have minimum credit score and income requirements. While each lender will have its own terms, you can usually borrow up to the total cost of attendance.
Private Student Loan vs Parent PLUS Loan: 7 Key Differences
When deciding between a private parent loan vs a Parent PLUS Loan, keep these major differences in mind:
|Parent PLUS Loan||Private Parent Student Loan|
|Issuer||U.S. Department of Education||Private lender|
|Interest Rate Type||Fixed||Fixed or variable|
|Interest Rate||6.28%||Varies by lender
(varies by lender)
|Fees||4.228% disbursement fee||None|
|Repayment Terms||10 Years||Varies by lender
At ELFI, 5 or 10 years
|In-School Repayment Options||Defer until after child graduates or immediate repayment||Varies by lender
|Eligible for Income-Driven Repayment||Yes, but only if the loan is consolidated with a Direct Consolidation Loan first||No|
|Eligible for Public Service Loan Forgiveness||Yes, but only if the loan is consolidated with a Direct Consolidation Loan first||No|
While Parent PLUS Loans are issued by the U.S. Department of Education, private parent loans can be issued by banks, credit unions, or specialty lenders.
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, 2021, and before July 1, 2022, have an interest rate of 6.28%.
With private parent loans, the rates can vary by lender and fluctuate based on market conditions. At ELFI, as of October 28, 2021, rates are as low as 1.20% for variable-rate loans and as low as 3.20% for fixed-rate loans – significantly lower than Parent PLUS rates.
Parent PLUS Loans are subject to disbursement fees. A fee of 4.228% will be deducted from your loan amount before it’s disbursed to you. For example, let’s say you took out a $20,000 Parent PLUS Loan. The government would deduct $845.60 — 4.228% of the loan amount — and would issue you the remaining $19,154.40.
With private parent loans, some lenders do charge origination or disbursement fees, 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 10 years. With private loans, you have more flexibility. You can choose a term of five, seven, or 10 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 after your child graduates.
Private parent loans have more options. 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 make payments only toward 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 per month while your child is in college. 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 after your child graduates. Just keep in mind that this is the most expensive option of the four repayment plans.
You can use ELFI’s student loan calculator to find out how much you may pay under each repayment plan.*
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, either. However, there is a workaround: 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 then pursue PSLF as well.
Which Parent Student Loan Is Best for You?
Private student loan vs Parent Plus Loans: Which is 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, while private loans have more repayment options. 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 submitting an application for either type, do some research and get rate quotes for private parent loans so you can make an informed decision.