If you are helping your child pay for their education, you have two main options for loans: Parent PLUS loans and private student loans. Parent PLUS loans might be a better option if you want to access federal repayment plans, but private loans can be cheaper if you have good credit. Read on for a full comparison of Parent PLUS Loan vs Private Loans so you can decide which option, if either, is right for you and your family.
Parent PLUS loan vs private loan rates
Let’s start with an overview of interest rates and terms for private loans and Parent PLUS loans.
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|Parent PLUS Loans||Private student loans|
|Credit requirements||No adverse credit history||Good credit (a FICO score in mid 600s or higher) or a co-signer with good credit|
|Interest rates (2019-2020)||7.08%||As low as 3.00% depending on the lender and the borrower’s credit rating|
|Loan fees (2019-2020)||4.236%||Varies depending on the lender|
|Annual loan limit||Up to the cost of attendance after application of other financial aid||Up to the cost of participation, but some lenders have their own loan limits|
|Possibility of co-signing with the student||No||Yes|
|Possibility to borrow in the name of the parent only||Yes||Yes|
|Can be used for graduate degrees||No||Yes|
As you research, some parents may get a lower private loan interest rate than a Parent PLUS loan. Specifically, parents with a good credit score and a healthy credit history could pay less with private loans.
This is especially true when you factor in Parent PLUS loan fees, as some private lenders do not charge any student loan fees or origination fees.
A Comparison of the Costs of Parent PLUS Loans vs. Private Loans
But let’s compare apples to apples by looking at Parent PLUS loans versus a similar private student loan. For example, consider a 10-year $ 10,000 student loan from Citizens Bank for parents with a fixed rate of 5.48% APR.
Assuming you choose to enter the full refund immediately, here’s how your costs would break down:
|Loan fees||Interest rate||Interest charge on $ 10,000||Total cost of the loan|
|Parent PLUS loan||$ 424||7.08% (2019-2020)||$ 3,983||$ 4,407|
|Citizens Bank student loan for parents||$ 0||5.48%||$ 3,011||$ 3,011|
With Citizens Bank, your lower rate and 0% start-up fee would save $ 1,396 over 10 years. If you borrow more than $ 10,000, lower rates and fees could save you even greater savings in this scenario.
Parent PLUS loans are a better deal for fair or poor credit
Parent PLUS loans can be a smart option for some parents despite their higher interest rates and fees. Applying for Parent PLUS loans requires a credit check, but the requirements are easier to meet than those for private student loans.
To be eligible for Parent PLUS loans, you must not have an “adverse credit history”. You could have an adverse credit history if you have:
- Debt totaling more than $ 2,085 that is 90 days or more past due, is in collection or has been written off within the past two years
- Debt accounts that list a bankruptcy discharge, repossession, default, foreclosure, wage garnishment or tax lien
But even if you have these negative ratings, you may be able to get a Parent PLUS loan by appealing or adding an endorser (similar to a co-signer) to your application.
It is easier to get approval for Parent PLUS loans than it is to get approval for private student loans. So, if you have bad credit, Parent PLUS loans might be your best bet.
When Private Lenders Could Offer You Your Best Student Loan Rates
Private student loans for parents can be the most affordable way to finance college under the right circumstances.
You have great credit
To get your lowest student loan rates from private lenders, you must meet the following conditions:
- Good or excellent credit
- Strong credit history and repayment history
- Debt-to-income ratio of 30% or less
If this sounds like you, get started shopping for private student loans. You will probably get some of your best student loan rates.
The most accurate way to find out if you could pay less with a private student loan is to ask for rate estimates. Lenders often provide rate checks before applying for a parent student loan and use a gentle credit check that won’t hurt your score. You can compare these offers to Parent PLUS Loans to find your best deal.
You choose a loan term of less than 10 years
Lenders often offer lower student loan rates for shorter loan terms. The lender will get their money back faster, which reduces their risk – a good reason to give you a better deal. If you are able to pay off your loans quickly, you may be able to get a better rate with a private lender.
Parent PLUS loans, on the other hand, only offer an interest rate of 7.08% (2019-2020) and a standard 10-year repayment period. On disbursement, there are no options that lead to a lower rate on these loans.
You opt for a variable rate
Variable rates tend to start lower than fixed rates, although they can increase over time. If you’re able to pay off your private student loan fairly quickly, choosing a variable rate can save you money.
With Parent PLUS loans, you don’t have the option of a variable rate, but a fixed rate. So, depending on your financial situation, a private student loan has the potential to offer greater interest savings than a federal loan.
Overall, Parent PLUS rates and private student loans make borrowing affordable for your child’s education. But which option, Parent PLUS loans versus private loans, will offer the best deal will depend on you and your financial situation.
Ultimately, shopping around and comparing student loan rates is always worth your time.
Rebecca Safier contributed to this article.