Paying for college is one of the biggest expenses a parent plans for, and it can seem overwhelming. At times, you might find yourself saving up for your kid’s future education while also trying to save for your own retirement, fund a house down payment, and pay off your own debt.
With the average annual cost of tuition and fees for the 2019-2020 school year at $11,260 for public in-state students, $27,120 for public out-of-state students, and $41,426 for private school students, it’s no wonder parents are taking out loans to help pay for their child’s undergraduate education.
One popular federal parent loan program is the federal Direct PLUS Loan, but before you start comparing parent PLUS vs. private parent student loans, it’s important to understand what a parent PLUS loan is and why there’s been a 42% increase in the amount of PLUS loan debt parents have taken on from 2007 to 2017.
What Are the Different Loans for College?
There are four types of federal Direct Loans offered by the U.S. Department of Education:
• Direct Subsidized Loans are loans offered directly to the student, where the interest on the loan is paid by the U.S. Department of Education while the student is in school and during a six-month grace period after graduation. Thus, they are subsidized.
• Direct Unsubsidized Loans are also offered directly to the student, but the interest is not paid by the federal government and it accrues while the student is in school.
• Direct PLUS Loans are loans for professional or graduate students, or for parents of undergraduate students.
• There are also Direct Consolidation Loans, which allow you to consolidate all federal loans into one loan with an interest rate that’s a weighted average of all your federal loans’ interest rates, rounded up to the nearest eighth of a percent.
Note that the federal parent loans can go by a number of names: parent PLUS Loans, Direct PLUS Loans, Direct parent loans. Those are all the same thing.
The main difference between the Direct student loans offered to undergraduates and the Direct PLUS Loans offered to parents is that certain Direct Loans (Direct Subsidized Loans) for undergraduates are awarded based on financial need, whereas the PLUS loans are not awarded based on financial need, but do require a credit check when applying.
In addition to federal loans, there are also private student loans available both for students and for parents. Private student loans are loans from banks or private lenders, which set their own interest rates and terms.
What Can These Loans Be Used For?
When a student’s financial aid package and other sources of funding aren’t enough to cover the cost of college and other educational expenses, parent PLUS loans and private student loans can help fill in the gaps. They can be used to cover expenses like tuition, room and board, books, and other supplies related to the total cost of attendance.
While they can both be used to cover the same expenses, they each have different benefits and terms so it’s worth considering your options as you determine how to pay for your child’s college education.
Qualifying for a Parent PLUS Loan
The first step to qualifying for any type of federal loan is to fill out the Free Application for Federal Student Aid (known as the FAFSA®). It’s a required step to document your child’s financial need. Colleges use the FAFSA information to determine a financial aid package—which could include grants, work-study, subsidized loans, and/or unsubsidized loans.
If your child is offered a financial aid package, you can then figure out how much of their tuition will be covered by financial aid vs how much you might need to take out additional loans to cover any remainder. At that point, you can start to weigh the benefits of private student loans vs. parent PLUS loans.
Parent PLUS Loan vs. Private Parent Student Loan
Understand what a parent PLUS loan is before you start comparing it to private loan options.
Pros of a Parent PLUS Loan
A Direct PLUS Loan allows parents to borrow the remainder of their child’s costs not covered by financial aid. The interest rates on PLUS loans are set by the federal government and are fixed for the life of the loan. There are a few repayment options that borrowers may be eligible for.
Cons of a Parent PLUS Loan
Fees on PLUS Loans are also higher than on the other Direct Loans. Most income-driven repayment plans are unavailable to parent PLUS loan borrowers, although they may be eligible for an Income-Contingent Repayment Plan under certain circumstances.
And you’ll have to start making payments on the loan as soon as it is disbursed —though you can request a deferment while your student is in school, but the interest on the loan will still accrue and add up. Of course, the loan is taken out in the parent’s name, so responsibility for paying the loan back is on you, not on your kid.
Qualifying for a Private Parent Student Loan
Qualifying for a private parent student loan is usually similar to qualifying for most other types of private loan. Private lenders will review an applicant’s credit history and score, among other personal financial criteria, to determine the rate and terms they’ll qualify for.
This typically means applicants with good or excellent credit could stand to qualify for a better interest rate when taking out private parent student loan when compared to the interest rate on a PLUS loan.
There are a variety of private companies that offer parent student loans, so parents have the option to shop around to find an interest rate and terms that suit their needs.
Some private lenders, including SoFi, have a pre-qualification process that allows potential borrowers to see personalized interest rate estimates based on a soft credit pull (which means their credit score won’t be impacted).
After selecting the preferred lender, borrowers typically file an application for the private parent loan. The exact process will vary slightly by lender.
SoFi offers low-rate, no-fee parent student
loans to help you pay for your child’s
Pros of a Private Parent Student Loan
One of the biggest pros of private parent student loans is a potentially lower interest rate when compared to PLUS loan for well-qualified borrowers.
As you compare private parent loan quotes, pay attention to additional fees like origination fees. These will vary by lender. Some lenders, like SoFi, don’t charge an origination fee for their private student loans.
Once you have an idea of the rates and terms available for private student loans, you can compare them to PLUS loans. Note that parent PLUS loans currently have an origination fee of 4.236% of the total loan amount.
Private parent student loans may also offer borrowers increased flexibility when it comes to repayment options. Private lenders typically allow parents to take out the loan on their own, or share the loan with their child. PLUS loans can only be taken out by the parent and cannot be transferred to the student.
Cons of a Private Parent Student Loan
Private parent student loans don’t come with the same borrower protections as a federal PLUS loan. In the event a borrower runs into temporary financial difficulty, a PLUS loan might qualify for deferment or forbearance. While some private lenders, including SoFi, do have policies to help borrowers who might be struggling in place, not all do.
Further, private student loans could potentially have higher interest rates than PLUS loans, depending on a variety of personal financial factors.
The chart below illustrates some general comparisons between parent PLUS loans and private parent student loans:
|Parent PLUS Loan||Private Parent Student Loan|
|Who is the primary borrower?||Biological, adoptive, or stepparent of a dependent undergraduate student.||Many lenders allow any adult sponsor of that child (parent, grandparent, friend, etc.) to borrow for a student.|
|Credit criteria for the Borrower?||Parents may not have adverse credit history. Parents with adverse credit history can apply with a cosigner or submit documentation that outlines extenuating circumstances for adverse credit history.||Generally, a strong credit history and score are key factors. Exact requirements will vary by lender.|
|Is school certification required?||Yes||Yes|
|Is the FAFSA® required?||Yes||No|
|Interest Rate||For loans taken out during the 2020 – 2021 school year the interest rate is fixed at 5.30%.||Varies by lender and is based on an individual borrowers history and other factors. Rates can be fixed or varied.|
|Is there a rate reduction for enrolling in automatic payments?||Yes, enrolling in autopay can result in a 0.25% reduction.||Varies by lender; SoFi offers a 0.25% reduction for enrolling in autopay|
|Are there any loan fees?||PLUS loans have a loan fee of 4.236% for the 2019 to 2020 school year.||Varies by lender (SoFi has zero fees, including late fees and insufficient funds fees.).|
|Annual Loan Limits||Cost of attendance (COA) minus other student aid||Cost of attendance (COA) minus other student aid|
|Where are funds disbursed?||Funds are disbursed directly to the school||Funds are typically disbursed directly to the school.|
|Are there any grace periods?||Payments are required immediately upon disbursement.||Options vary by lender.|
|Forbearance Options||Yes, limits can vary. For a full breakdown on forbearance options available to PLUS loan holders, review the Federal Student Aid Website .||In terms of forbearance, many lenders offer 12 months of forbearance for the life of the loan. But this will vary by lender.|
|Repayment Terms||PLUS loans are eligible for the Standard, Extended, or Graduated repayment plans.||Repayment terms vary by lender (SoFi offers repayment terms of 5, 7, 10, or 15 years).|
|Death Discharge||PLUS loans can be discharged in the event the student or parent dies.||Some lenders offer death forgiveness if the student who receives the benefit dies while in school or after graduation. When a parent with a private parent loan dies, the estate is typically responsible for the loan.|
|Disability Discharge||Parent only||Disability discharge varies by lender. Some lenders allow for total discharge dependent on disability; however, the requirements vary by lender.|
|Can the loans be consolidated?||Yes. Can be consolidated through a Direct Consolidation Loan.||Yes, private loans can be consolidated and refinanced through a private lender. New rates and terms will vary by lender and based partially on a borrower’s credit history.|
Choosing Between a Direct PLUS Parent Loan vs. Private Loan
When you’re deciding between a parent PLUS loan and a private loan, you’ll want to weigh all the costs and consider your other options too.
Besides the Direct PLUS parent loan, there are other ways to finance your kid’s college education. Many parents start a 529 savings plan when their kid is very young, which could potentially have enough set aside by the time they start college.
Another possibility is a home equity line of credit, if you own a home, which could potentially have a lower interest rate than a Parent PLUS Loan, but would also put your house on the line and extend your mortgage repayment.
You might even be weighing the possibility of taking out a 401(k) loan or withdrawing money from your retirement account. But both of those options come with penalties for early withdrawal, so you’ll likely want to compare the costs to private loans.
Borrowers with strong credit histories and income might be able to qualify for a lower interest rate on a private parent loan.
Depending on a variety of financial factors, you might also be able to secure a lower interest rate or a shorter term, which could be a boon if you’re willing and able to repay the loan on a shorter repayment plan than is available on PLUS loans — which can help you save money in the long-term.
Stretching out a loan repayment and using forbearance when you don’t need to are just a few of the common mistakes people make with student loans.
However, if you need to cover the costs of your kid’s education and you don’t qualify for a lower interest rate, then a PLUS loan might be the best option for you. Additionally, if you want to take advantage of federal benefits, such as income-driven repayment or deferment options, then you’ll likely want to consider a PLUS loan.
PLUS loans may allow you to defer repayment while your student is enrolled and for a grace period of up to six month after graduation, although the interest builds up during that time and you’ll end up paying more over the term of the loan.
Parent Student Loans With SoFi
Given how much college costs these days, it’s likely you and your child will have to take out some loans—whether student loans, parent loans, or both. SoFi offers low-rate, no fee parent student loans that are built to help you pay for your child’s education.
And when we say no fees, we mean no fees. That means no origination fees, no late fees, no prepayment penalties, and no insufficient funds fees.
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SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.