Once you and your student have discussed the cost of the colleges they’re considering attending and who will be paying for their education, it’s time to get into the details of how to finance it.
If your student needs more money for school beyond federal loans in their name, you may choose to help them out. That’s where direct PLUS loans—more commonly known as Parent PLUS loans—and private student loans come in. PLUS loans are issued by the federal government to the parent of a qualified student enrolled in school. However, this is not the only option for parents looking to borrow to pay for their child’s education. There are also private education loans that are issued by private lending institutions, like a bank or Earnest.
Understanding the differences between Parent PLUS loans and cosigned private loans will help you decide which is the better option for funding your student’s college education.
How a Federal Parent PLUS Loan Works
Before you can apply for a PLUS loan, you’ll need to file the FAFSA (Free Application for Federal Student Aid). The FAFSA will not only let the US Department of Education and your child’s school determine how much financial aid they can receive, but also which federal loan types your family is qualified for. Students should max out subsidized federal loans first, because the federal government pays the interest on these loans while they’re in school and during any grace periods or deferments. Students may also qualify for unsubsidized federal loans, but there is a maximum for how much you can borrow from the government each year—and that number is pretty low compared to tuition costs of many schools these days.
A Parent PLUS loan has a fixed interest rate, which means it will stay consistent throughout the life of the loan. The interest rate for Parent PLUS loans for the 2019-2020 school year is 7.08%. This also means that, although your recent repayment record will be checked to determine if you qualify for the loan, you won’t be eligible for a lower interest rate if you have great credit.
The maximum amount you can borrow is the cost of the school’s cost of attendance minus any other financial aid your student receives. Keep in mind that unlike a mortgage or other type of consumer loan, the Department of Education process does not review whether your income is likely to make the loan payments manageable so be sure to do a little budgeting on your own.
Parent PLUS loans also come with an upfront origination fee, which is deducted from each disbursement. Right now, the fee is 4.236% of the loan amount.
While you can request a deferment so that you don’t need to make payments until six months after your student graduates or leaves school, interest will still accrue during this time.
Unlike many other student loan options, a Parent PLUS loan will be in the parent’s name and cannot be transferred to the student—which means that you, the parent, are legally responsible for repaying the loan.
These loans also come with multiple options for repayment plans, so you can choose based on your current financial situation and future outlook. Parent PLUS loans are also eligible for consolidation, which then gives you the chance to use an income-driven payment plan that sets your monthly payment at a number that’s deemed reasonable based on your income. If you’re having trouble making payments, you may also be able to request a deferment or forbearance, which allows you to lower or temporarily stop payments—though, again, interest will not stop accruing during that time.
Alternatives to Parent PLUS Loans
Since private loans (and their interest rates) are contingent on a strong credit history, your student will likely need a cosigner—that’s you!—to take one out. Private student loans can have a fixed or variable interest rate, but the specific rate will always depend on the applicant and cosigner’s credit history. This means that parents with a strong financial profile may be able to qualify for an interest rate that’s lower than a federal Parent PLUS loan by cosigning a private loan. Being a cosigner also means that you and your student are both responsible for repayment.
Loan fees vary by lender, but Earnest’s cosigned private loans, for example, do not come with a disbursement or origination fee. The total amount you’re able to borrow will also depend on the lender and the student and cosigner’s credit profiles.
Private loans don’t come with federal loan forgiveness and repayment options. Some private lenders will let you defer payments until after graduation; others may require you to start making payments while your child is still in school, which can save you money in the long run.
Private loans can be consolidated or refinanced down the road, potentially lowering your interest rate and/or reducing your monthly payment depending on your financial situation at the time you refinance.
Federal Plus Loan vs. Private Loan
Having a fixed rate on your loan can be helpful—it’s definitely nice to not worry about sudden rate increases and know exactly what you’re expected to pay. You may also want to have those federal loan repayment and forgiveness options that come along with Parent PLUS loans. But for parents with a strong, established credit history, cosigning a private loan could score you an even lower interest rate and fewer (if any) fees. And paying less in interest or fees is always a good thing.
Once you’ve filled out the FAFSA and learned what types of aid and federal loans your student qualifies for at the various schools they are considering, the next step is to look into which additional loans you and your student may be able to take out so that you can shop around for the loan that works best for your family.