Comparing Loans? Here Are the Pros and Cons of Parent PLUS and Private Loans (2024)

FAQs

Is it better to do a parent PLUS loan or private loan? ›

Use Parent PLUS Loans if your credit is less than perfect. Use parent private student loans if you have good credit and can qualify for a lower interest rate. Use parent private student loans if you'd prefer a loan with a variable interest rate.

A student loan is borrowed by a student, while a parent loan is borrowed by a parent. While parents can cosign a student loan, the student remains the primary borrower.

If you can pay back your loan quickly and can qualify for a low interest rate, a private student loan may be best. If you'd like to take advantage of income-driven repayment plans, extensive deferment programs and potential loan forgiveness, a federal student loan is the best option.

Access to extra funds could help if your child's financial aid package falls short due to a high Expected Family Contribution (Student Aid Index). PLUS loans don't require good credit, making them an ideal option for low-credit borrowers.

Parent PLUS Loan interest rates and fees are set by the Education Department, based on when the loan is originated. PLUS Loans have the highest rates of any type of federal student loan. Private parent loan interest rates can be fixed or variable and are based on the borrower's creditworthiness.

No, a Direct PLUS Loan made to a parent cannot be transferred to the child. You, the parent borrower, are legally responsible for repaying the loan.

Public Service Loan Forgiveness for Parent PLUS Loans

Parent borrowers may be eligible for Public Service Loan Forgiveness (PSLF) after making 120 qualifying payments (ten years). Parent PLUS loans are eligible if they are in the Direct Loan program or included in a Federal Direct Consolidation Loan.

The Cons of Private Student Loans

Most private student loans do not offer income-driven repayment plans. Private student loans do not qualify for teacher loan forgiveness or public service loan forgiveness. Private student loans have limited options for financial relief when a borrower experiences financial difficulty.

What is the disadvantage of private loan? ›

Interest rates can be higher than alternatives

Interest rates for personal loans are not always the lowest option. This is especially true for borrowers with poor credit, who might pay higher interest rates than credit cards or a secured loan requiring collateral.

The interest rates on some private student loans are lower than rates on federal loans for those who qualify. You'll typically need excellent credit to get the best rates, though. If you wind up with a high interest rate, you may be able to refinance later, Stark points out. No upfront fees in most cases.

Generally, there are two types of student loans—federal and private. Federal student loans and federal parent loans: These loans are funded by the federal government. Private student loans: These loans are nonfederal loans, made by a lender such as a bank, credit union, state agency, or a school.

The parent, not the student, is responsible for repaying the PLUS loan. PLUS loans don't qualify for all of the income-driven repayment plans that student loans do. PLUS loans have large borrowing limits, making it possible to take on too much debt.

The federal parent PLUS loan offers the most wide-ranging benefits to borrowers. Parents have access to multiple repayment plans that can lower the amount you pay, particularly the income-contingent repayment plan (which you must consolidate your loan to qualify for).

Taking out a parent loan

It's always you. Because the loan's in your name, making payments regularly will affect only your credit score, not your child's. You won't have the potential to boost your child's credit score like you would by co-signing.

Direct PLUS loans can help pay for education expenses not covered by other financial aid. The U.S. Department of Education makes Direct PLUS Loans to eligible parents through schools participating in the Direct Loan Program. (We also offer PLUS loans for graduate or professional students.)