Parent PLUS and other types, how to compare
- Parent loans can help your child pay for the cost of college that they could not afford on their own.
- Choose between a federal loan and a private parental loan, both of which have advantages and disadvantages.
- Make sure you have enough money to pay off your debt — don’t expect your loan to be forgiven.
If the financial aid your child receives for their college education is not enough to make them affordable, a parental loan is one way to fill the gap.
As a parent or guardian, you can borrow money on behalf of a student to help pay for their education. You can take out a government or private loan and will be fully responsible for repaying it.
What is a Direct PLUS Loan?
A Direct PLUS loan is the federal option for parent loans. PLUS stands for Parent Loan for Undergraduate Students. You can use them to pay for expenses not covered by other financial aid offered by your child’s school.
The US Department of Education provides these loans, often referred to as Parent PLUS loans. You won’t be able to get one if you have a bad credit record. The cost of attendance minus any other financial assistance your child receives will determine the total amount available to you.
These loans have fixed interest rates with payment terms of up to 25 years. You will make monthly or quarterly payments. The first payment is often due 60 days after all funds have been received.
“Taking out a Parent PLUS loan can make sense if you have a clean credit history and want a borrowing option that offers flexible repayment terms,” says student loan attorney Leslie Tayne. “You also need to make sure that you don’t jeopardize your ability to retire by taking on this debt for your child.”
The rate for the 2022-23 school year is set at 7.54%. The loans are unsubsidized, which means interest will accrue while your child is in school. Interest payments on federal student loans have been suspended until the end of August 2022 due to the coronavirus pandemic.
You will also pay an origination fee of 4.228%, which will be deducted from the disbursement of the loan. There are no prepayment penalties with a Direct PLUS loan, so you can prepay it free of charge.
What is a private parent loan?
A private parental loan is money you borrow from a lender such as a bank, credit union, or online institution to fund your child’s education. Interest rates and terms vary by lender.
Interest rates on private loans can be more competitive than federal loans, but private loans often come with fewer protections. For example, they were left out of the Biden administration’s pause on student loan repayments. They would also not be eligible for large-scale student loan forgiveness.
“I’m not a fan of private lending,” says Kate Mielitz, special groups manager at the Association for Financial Counseling & Planning Education. “Often they have variable interest rates. But even when they don’t, the repayment period begins almost immediately. There is no deferment period. Parent PLUS Loans offer at least a adjournment option.”
How to compare a Direct PLUS loan with a private loan
There are several factors to consider when comparing the two parental loan options. Lyle Solomon, consumer credit expert and senior counsel at Oak View Law Group, says there are five key things to consider when making a decision:
1. Interest rate type. Direct PLUS loans have fixed interest rates. You have the choice between a fixed loan and a variable loan with a private company.
2. Interest rate. Direct PLUS loans have an interest rate of 7.54%. Private companies can start their rates much lower, although the rate you receive depends on your
credit score
.
3. Assembly costs. The origination fee on a Direct PLUS loan is 4.228%. Origination fees on private loans vary by lender, and some charge nothing at all.
4. Mandate’s duration. Private student loans have a term of five to 20 years. Direct PLUS loans have terms between 10 and 25 years.
5. FAFSA required? You must complete the Free Application for Federal Student Aid for a Direct PLUS Loan. Private loans do not require this.
Both types of loans require a credit check, allow you to borrow up to tuition fees, and may allow you to deduct interest payments from your taxable income.
Key considerations before taking out a loan for your child
It may seem obvious, but remember that any debt incurred through a parental loan must be repaid. Make sure you have the means to repay any debt incurred, even if it is to help your child go to the school of their dreams.
Also be aware that whatever agreement you make with your child – for example, if they may repay part of the parental loan themselves – you are the only one with a connection to the lender.
“A new plan may be necessary if you or your student cannot afford to take on enough debt to cover the full cost of attendance,” Solomon says. “Earning more money throughout school terms and during breaks can help your student pay for tuition as it arises.”
To save on the cost of a loan, you can also make payments while your child is still in school, reducing the overall interest you’ll pay.
Mielitz says you need to make sure you’re able to fit a parental loan into your monthly budget.
“As a former college professor, I really want college students,” says Mielitz. “But college isn’t for everyone. Parent loans aren’t for everyone. Before you sign on the dotted line, consider the costs, especially your costs, because these are your parent loan. A community college or junior college is a great way to start the college experience with a lower price.”