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How does a home equity loan work? First, it’s important to understand that the term home equity loan is simply a catchall for the different ways the equity in your home can be used to access cash. The most common types of home equity loans are fixed-rate home equity loans, home equity lines of credit (HELOCs), and cash-out refinancing. The best type of home equity loan option for you will depend on your specific needs, so it’s helpful to know the characteristics of each to do an informed home equity loan comparison.

What Are the Main Types of Home Equity Financing?

When folks think of home equity loans, they typically think of either a fixed-rate home equity loan or a home equity line of credit (HELOC). There is a third way to use home equity to access cash, and that’s through a cash-out refinance.

With fixed-rate home equity loans or HELOCs, the primary benefit is that the borrower may qualify for a better interest rate using their home as collateral than by using an unsecured loan — one that is not backed by collateral. Some people with high-interest credit card debt may choose to use a lower-rate home equity loan to pay off those credit card balances, for instance.

This does not come without risks, of course. Borrowing against a home could leave it vulnerable to foreclosure if the borrower is unable to pay back the loan. A personal loan may be a better fit if the borrower doesn’t want to put their home up as collateral.

How much a homeowner can borrow is typically based on the combined loan-to-value ratio (CLTV ratio) of the first mortgage plus the home equity loan. For many lenders, this figure cannot exceed 85% CLTV. To calculate the CLTV, divide the combined value of the two loans by the appraised value of the home. In addition, utilizing a home equity loan calculator can help you understand how much you might be able to borrow using a home equity loan. It’s similar to the home affordability calculator you may have used during the homebuying process.

Of course, qualifying for a home equity loan or HELOC is typically contingent on several factors, such as the credit score and financial standing of the borrower.

Fixed-Rate Home Equity Loan

Fixed-rate loans are pretty straightforward: The lender provides one lump-sum payment to the borrower, which is to be repaid over a period of time with a set interest rate. Both the monthly payment and interest rate remain the same over the life of the loan. Fixed-rate home equity loans typically have terms that run from five to 30 years, and they must be paid back in full if the home is sold.

With a fixed-rate home equity loan, the amount of closing costs is usually similar to the costs of closing on a home mortgage. When shopping around for rates, ask about the lender’s closing costs and all other third-party costs (such as the cost of the appraisal if that will be passed on to you). These costs vary from bank to bank.

This loan type may be best for borrowers with a one-time or straightforward cash need. For example, let’s say a borrower wants to build a $20,000 garage addition and pay off a $4,000 medical bill. A $24,000 lump-sum loan would be made to the borrower, who would then simply pay back the loan with interest. This option could also make sense for borrowers who already have a mortgage with a low interest rate and may not want to refinance that loan.

Recommended: What Is a Fixed-Rate Mortgage?

Home Equity Line of Credit (HELOC)

A HELOC is revolving debt, which means that as the balance borrowed is paid down, it can be borrowed again during the draw period (whereas a home equity loan provides one lump sum and that’s it). As an example, let’s say a borrower is approved for a $10,000 HELOC. They first borrow $7,000 against the line of credit, leaving a balance of $3,000 that they can draw against. The borrower then pays $5,000 toward the principal, which gives them $8,000 in available credit.

HELOCs have two periods of time that borrowers need to be aware of: the draw period and the repayment period.

•   The draw period is the amount of time the borrower is allowed to use, or draw, funds against the line of credit, commonly 10 years. After this amount of time, the borrower can no longer draw against the funds available.

•   The repayment period is the amount of time the borrower has to repay the balance in full. The repayment period lasts for a certain number of years after the draw period ends.

So, for instance, a 30-year HELOC might have a draw period of 10 years and a repayment period of 20 years. Some buyers only pay interest during the draw period, with principal payments added during the repayment period. A HELOC interest-only calculator can help you understand what interest-only payments vs. balance repayments might look like.

A HELOC may be best for people who want the flexibility to pay as they go. For an ongoing project that will need the money portioned out over longer periods of time, a HELOC might be the best option. While home improvement projects might be the most common reason for considering a HELOC, other uses might be for wedding costs or business startup costs.

How Interest Rates Work on a HELOC

Unlike the rate on a fixed-rate loan, a HELOC’s interest rate is variable and will fluctuate with market rates, which means that rates could increase throughout the duration of the credit line. The monthly payments will vary because they’re dependent on the amount borrowed and the current interest rate.

When you take out a HELOC, you’ll start out in the draw period. Once you take out funds, you’ll be charged interest on what you’ve withdrawn. With some HELOCs, during the draw period, you’re only required to pay that interest; others charge you for both interest and principal on what you’ve withdrawn. During the repayment period, you won’t be able to withdraw money any longer, but you will need to make regular payments to repay the principal and interest on what you withdrew.

Home Equity Loan and HELOC Fees

Home equity loans and HELOCs both come with closing costs and fees, which may be anywhere from 1% to 5% of the loan amount. What those fees are and how you pay them, however, can vary by loan type. HELOCs may involve fewer closing costs than home equity loans, but often come with other ongoing costs, like an annual fee, transaction fees, and inactivity fees, as well as others that don’t pertain to home equity loans.

Generally, under federal law, fees should be disclosed by the lender. However, there are some fees that are not required to be disclosed. Borrowers certainly have the right to ask what those undisclosed fees are, though.

Fees that require disclosure include application fees, points, annual account fees, and transaction fees, to name a few. Lenders are not required to disclose fees for things like photocopying related to the loan, returned check or stop payment fees, and others. The Consumer Finance Protection Bureau provides a loan estimate explainer that will help you compare different estimates and their fees.

Home Equity Loan and HELOC Tax Deductibility

Since the passage of the One Big Beautiful BIll Act in July 2025 made permanent the mortgage deduction provisions of the Tax Cuts and Jobs Act of 2017, interest on home equity loans and HELOCs is only deductible if the funds are used to buy, build, or substantially improve the home securing the loan. What’s more, there’s a max of $750,000 on the amount of mortgage interest you can deduct ($375,000 each for spouses filing separately). Checking with a tax professional to understand how a home equity loan or HELOC might affect a certain financial situation is recommended.

Cash-Out Refinance

Mortgage refinancing is the process of paying off an existing mortgage loan with a new loan from either the current lender or a new lender. Common reasons for refinancing a mortgage include securing a lower interest rate, or either increasing or decreasing the term of the mortgage. Depending on the new loan’s interest rate and term, the borrower may be able to save money in the long term. Increasing the term of the loan may not save money on interest, even if the borrower receives a lower interest rate, but it could lower the monthly payments.

With a cash-out refinance, a borrower may be able to refinance their current mortgage for more than they currently owe and then take the difference in cash. For example, let’s say a borrower owns a home with an appraised value of $400,000 and owes $200,000 on their mortgage. They would like to make $30,000 worth of repairs to their home, so they refinance with a $230,000 mortgage, taking the difference in cash.

As with home equity loans, there typically are some costs associated with a cash-out refinance. Generally, a refinance will have higher closing costs than a home equity loan.

This loan type may be best for people who would prefer to have one consolidated loan and who need a large lump sum. But before pursuing a cash-out refi you’ll want to look at whether interest rates will work in your favor. If refinancing will result in a significantly higher interest rate than the one you have on your current loan, consider a home equity loan or HELOC instead.

When to Consider a Cash-Out Refinance

A cash-out refinance is worth looking into when you’ve built up equity in your home but feel that your mortgage terms could be better – and you need a lump sum. Let’s say you want to renovate your kitchen, and you need $40,000. You’ve had your mortgage for a few years but your credit score has improved since you got it and you could be eligible for a significantly better interest rate now. That combination of factors makes a cash-out refi worth considering. If a refinance would not make sense for you, then a cash-out refi wouldn’t, either. Instead, you might want to consider another kind of loan.

Pros and Cons of Cash-Out Refinancing

Cash-out refinances involve both advantages and drawbacks. Here are some of the most significant.

Comparing Home Equity Financing Options

The different types of home equity loans all allow you to draw on the equity you’ve built in your home to access funds. But each type has different strengths and weaknesses, and the best type of home equity loan option for you will depend on your situation and the characteristics of the loan.

Which Type Is Right for You?

If you’re content with your mortgage – you don’t think you could get a better rate and your payments fit your budget – and you need a lump sum all at once, a home equity loan might make the most sense. To consolidate high-interest debt, buy a boat, or take a once-in-a-lifetime vacation, this might be a good option.

If your mortgage is fine and you need funds for a project that’s going to require withdrawals over time, a HELOC might be a good fit. Say you’re financing your child’s college education or starting a new business – having a line of credit to draw on when you need it could be extremely helpful.

Finally, if you’re looking for a lump sum and you feel that your mortgage isn’t a good fit, a cash-out refinance could be for you. Perhaps you could get a lower interest rate now or you’d like your term to be shorter and can afford the higher payments. In that case, a cash-out refinance could be useful.

Factors to Consider Before Choosing

As you do your home equity loan comparison and think about your options, it’s important to consider carefully what will really work best for you. Here are some questions to review.

•   Will you be able to handle the additional debt in your budget?

•   Do you need an upfront cash sum or access to funds over time?

•   Can you realistically improve significantly on your current mortgage terms?

•   Is what you stand to gain worth more than the price of your closing costs and any other fees involved?

•   Are you okay with payments that vary or would you prefer knowing that your payments will stay the same?

•   Are you comfortable knowing that your lender may be able to foreclose on your home if you can’t make your payments?

The Takeaway

There are three main types of home equity loans: a fixed-rate home equity loan, a home equity line of credit (HELOC), and a cash-out refinance. Just as with a first mortgage, the process will involve a bank or other creditor lending money to the borrower, using real property as collateral, and require a review of the borrower’s financial situation. Keep in mind that cash-out refinancing is effectively getting a new mortgage, whereas a fixed-rate home equity loan and a HELOC involve another loan, which is why they’re referred to as “second mortgages.”

While each can allow you to tap your home’s equity, what’s unique about a HELOC is that it offers the flexibility to draw only what you need and to pay as you go. This can make it well-suited to those who need money over a longer period of time, such as for an ongoing home improvement project.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit from SoFi, brokered through Spring EQ.

FAQ

What is the downside of a home equity loan?

The primary downside of a home equity loan is that the collateral for the loan is your home, so if you found yourself in financial trouble and couldn’t make your home equity loan payment, you risk foreclosure. A second consideration is that a home equity loan provides you with a lump sum. If you are unsure about how much you need to borrow, consider a home equity line of credit (HELOC) instead.

How much does a $50,000 home equity loan cost?

The exact cost of a $50,000 home equity loan depends on the interest rate and loan term. But if you borrowed $50,000 with a 6.50% rate and a 10-year term, your monthly payment would be $568 and you would pay a total of $18,129 in interest over the life of the loan.

Can you use a home equity loan for anything?

Typically, you can use a home equity loan for just about anything you want to. Common reasons for taking out a home equity loan are to consolidate higher-interest debt, to pay for medical bills, and to fund major home repairs or upgrades. It’s important to remember that your house serves as collateral for the loan, so you want to be sure your use is worth the risk.

How do I qualify for a home equity loan?

To qualify for a home equity loan, you generally need to be a homeowner with at least 20% equity in your home. You’ll also need to have a credit score of at least 620 and a debt-to-income ratio of no more than 43%. Typically, lenders will want to see that you have a steady, reliable source of income and will be able to pay back the loan.

What is the difference between a HELOC and a cash-out refinance?

A home equity line of credit (HELOC) and a cash-out refinance are both ways of tapping your home equity to get cash, but they work differently. With a HELOC, you use your home as collateral to get a revolving line of credit, which lets you take out cash as you need it, up to a set limit, during the initial draw period (usually 10 years). During the repayment period that follows, you repay principal and interest on what you’ve borrowed. A cash-out refinance involves refinancing your mortgage for more than you currently owe and taking the difference as a cash lump sum.

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^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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Student loan debt can be overwhelming, especially as interest builds and payments drag on for years after graduation. For borrowers seeking relief, one strategy that sometimes comes up is using a personal loan to pay off student loans. On the surface, it may seem like a simple debt-swap — replace one loan with another and, ideally, secure better terms. But is it a smart idea?

While personal loans can be used for many things, they are generally not the best option for paying off student loans. Many lenders prohibit using personal loans for educational costs (including SoFi), which includes paying off student loans. Even if you can find a lender that does allow it, there are pros and cons to using a personal loan to pay off your student loan balance. Here’s what you need to know.

Personal Loans vs. Student Loans

At first glance, personal loans and student loans might seem similar. Both provide a lump sum of money up front, require you to pay it back in monthly payments, and charge interest. But the structure, purpose, and protections of each are different.

Student loans are specifically designed to help finance education. They often feature relatively low interest rates and deferred repayment while in school. In the case of federal student loans, they also offer unique benefits like income-driven repayment (IDR) plans, forbearance during hardship, and potential forgiveness programs.

Personal loans, by contrast, are loans that can be used for virtually any legal purpose. Common uses for personal loans include home renovations, unexpected emergencies, medical expenses, major events like weddings, and debt consolidation (when you combine multiple high-interest debts into a single loan with a potentially lower interest rate).

Personal loans tend to carry shorter repayment terms (often two to seven years), and their interest rates can vary widely based on your credit score. Importantly, they don’t offer any of the protections or flexible repayment options that federal student loans provide.

Note: While SoFi personal loans cannot be used for post-secondary education expenses, we do offer private student loans with great interest rates.

Can You Use a Personal Loan to Pay Off Student Loans?

It depends. While it may technically be possible to use a personal loan to pay off your student loans, either federal or private, many lenders do not allow you to use the proceeds of a personal loan for this purpose.

This restriction exists largely due to regulatory and risk concerns. Education-related lending in the U.S. is heavily regulated, and lenders that want to offer student loan refinancing must meet specific legal and compliance standards. To avoid those complications, many personal loan providers choose not to allow their products to be used for anything related to student loans or education.

If you are unsure if a lender will allow you to use the funds to pay off your student debt, it’s a good idea to let them know this is your intent at the outset. This could be a reason why you would be denied for a personal loan. However, if you use the proceeds of a personal loan for a prohibited use, you’ll be violating the loan agreement and might face legal consequences or be required to repay the full amount of the loan immediately.

So while using a personal loan to pay off student debt is theoretically possible, finding a lender that allows it — and does so under favorable terms — could be a major challenge.

Private vs. Federal Student Loans

If you do happen to find a lender that permits this use, it’s crucial to consider what kind of student loans you’re dealing with.

Private student loans often come with fewer borrower protections and may carry higher interest rates than federal loans. If your credit is excellent and the new personal loan offers a better rate and shorter term, using it to pay off private loans could make financial sense — if permitted by the lender.

Federal student loans, however, come with significant advantages that you will lose if you switch to a personal loan. These include access to IDRs, deferment and forbearance options, and the possibility of forgiveness through Public Service Loan Forgiveness (PSLF). Giving up these benefits for a loan that’s less flexible could be risky.

Pros and Cons of Using a Personal Loan to Pay off Student Loans

If you can find a lender that allows it, here are some pros and cons of using a personal loan to pay off student debt.

Pros

•  Potentially lower interest rate: If you took out private student loans with a relatively high rate and currently have strong credit, you may be able to qualify for a personal loan with a lower rate than your student loans.

•  Predictable payments: If you have a private student loan with a variable interest rate, using a fixed-rate personal loan to pay it off will provide you with a fixed monthly payment, which can make budgeting simpler.

•  Faster repayment timeline: Because personal loans usually have shorter terms, using a personal loan to pay off your student debt could help you eliminate your student loan debt more quickly — provided you can afford the higher payments.

Cons

•  Loss of federal protections: If you’re paying off federal student loans, you’ll forfeit benefits like IDR plans, deferment, forbearance, and forgiveness opportunities, which can provide a valuable safety net.

•  Higher monthly payments: Because personal loans generally have shorter repayment terms than student loans, your monthly payments may be higher, even if the interest rate is lower.

•  No tax benefits: You can generally deduct student loan interest, up to $2,500, from your taxable income each year. Interest on personal loans, on the other hand, doesn’t qualify for a similar tax break.

Other Ways to Pay Off Student Loans

If using a personal loan to pay off your student loans isn’t feasible or cost-effective, here are some other student loan repayment options to consider.

Student Loan Refinancing

Student loan refinancing involves taking out a new student loan from a private lender to replace one or more existing loans, ideally at a lower interest rate. Unlike personal loans, there are numerous options available when it comes to finding a lender that will refinance your student loans.

Be aware, though: Refinancing federal loans with a private lender will still eliminate federal protections. Also keep in mind that refinancing student loans for a longer term can increase the overall cost of the loan, since you’ll be paying interest for a longer period of time.

Recommended: Online Personal Loan Calculator

Income-Driven Repayment Plans

If you have federal loans and your payments are unaffordable, you may qualify for an IDR plan. Generally, your payment amount under an IDR plan is a percentage of your discretionary income and remaining debt may be forgiven after decades of consistent repayment.

Keep in mind that under the new domestic policy bill, many existing federal IDR plans will close by July 1, 2028. After those plans are eliminated, borrowers whose loans were all disbursed before July 1, 2026, can choose between the Repayment Assistance Plan (RAP) and Income-Based Repayment (IBR) plan.

Federal Loan Consolidation

Federal loan consolidation allows you to combine multiple federal loans into a single loan with a weighted average interest rate. Consolidation can simplify repayment and may help you qualify for certain forgiveness programs, but you won’t necessarily save on interest.

Loan Rehabilitation

If your federal loans are in default, loan rehabilitation allows you to make a series of consecutive, agreed-upon payments (usually nine over ten months) to bring your loan current. This also removes the default status from your credit report and restores eligibility for federal benefits. To begin the loan rehabilitation process, you must contact your loan holder.

Currently, borrowers can only use a rehabilitation agreement to remove their loans from default once. Starting July 1, 2027, borrowers will be able to use rehabilitation to exit default twice.

The Takeaway

While the idea of using a personal loan to pay off student loans might seem appealing, it may not be a viable nor an advisable solution. Many lenders prohibit using personal loan funds for education-related expenses, including paying off student loans. Even if you find a lender that allows it, the trade-offs can be significant, especially if you’re dealing with federal student loans.

Instead, you might explore options designed specifically for managing student debt, such as student loan refinancing, consolidation, or enrolling in an income-driven repayment plan. These programs may offer benefits that are better fit to your situation.

Debt repayment strategies are not one-size-fits-all. It’s important to carefully evaluate your options — and read the fine print — before making a move that could impact your financial future for years to come.

While SoFi personal loans cannot be used for post-secondary education expenses, they can be used for a wide range of purposes, including credit card consolidation. SoFi offers competitive fixed rates and same-day funding for qualified borrowers. See your rate in minutes.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Can you consolidate student loans with a personal loan?

Technically, you might be able to use a personal loan to pay off student loans, but it’s not true consolidation — and many lenders don’t allow it. Personal loan lenders will often explicitly prohibit using loan funds for education-related expenses, including paying off existing student loans. Even if permitted, this route eliminates federal protections like income-driven repayment and forgiveness programs. Alternatives such as federal consolidation or student loan refinancing can be safer and more effective ways to manage or streamline student loan repayment.

What are the risks of using a personal loan to pay off student debt?

Using a personal loan to pay off student debt carries several risks, starting with the fact that many lenders prohibit this use altogether. If you find a lender that allows it, keep in mind that using a personal loan to pay off federal student loans will mean losing federal benefits like income-driven repayment, deferment, forbearance, and loan forgiveness. Personal loans also typically have higher interest rates and shorter repayment terms than student loans, which could increase your monthly payments.

Does paying off student loans with a personal loan hurt your credit?

Many personal loan lenders don’t allow you to use a personal loan to pay off student loans. But if you can find one that does, paying off student loans with a personal loan may impact your credit in several ways.
Initially, your credit could dip temporarily due to the new account and hard inquiry. However, if you make regular, on-time payments, the loan could have a positive influence on your credit profile over time. On the other hand, missed payments could negatively affect your credit. It’s important to consider lender rules and your ability to manage repayment before using a personal loan to pay off student loans.

Are there better options than personal loans for student debt?

Yes, there are a number of options that may be better than personal loans for paying off student loans. Federal consolidation loans can combine multiple federal loans into one, simplifying repayment. Income-driven repayment plans for federal loans adjust payments to your earnings, making them more manageable. Refinancing with a private lender might reduce rates and monthly payments Additionally, some employers offer student loan repayment assistance, which can significantly ease the financial burden.

Can using a personal loan to pay student loans disqualify you from forgiveness programs?

Yes. If you pay off your federal student loans with a personal loan, you’ll forfeit federal benefits like income-driven repayment, deferment, forbearance, and loan forgiveness. The same is true if you refinance your federal student loans with a private student loan lender.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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When an undergraduate’s financial aid doesn’t meet the cost of attendance at a college or career school, parents may take out a Direct PLUS Loan in their name to bridge the gap.

These loans, also called Parent PLUS Loans, are available to parents when their child is enrolled at least half-time at an eligible school. Before you apply, it’s important to understand the benefits and challenges of this kind of federal student loan.

A “Direct” Difference

First, to clarify, there are federally funded Direct Loans that are taken out by students themselves. Then there are federally funded Direct PLUS Loans, commonly called Parent PLUS Loans, when taken out by parents to help dependent undergrads.

To apply for a Parent PLUS Loan, students or their parents must first fill out the Free Application for Federal Student Aid (FAFSA®).

A parent applies for a PLUS Loan on the Federal Student Aid site. A credit check will be conducted to look for adverse events, but eligibility does not depend on the borrower’s credit score or debt-to-income ratio.

💡 Quick Tip: Some lenders help you pay down your student loans sooner with reward points you earn along the way.

Pros of Parent PLUS Loans

Nearly 4 million parents (and in some cases, stepparents) have taken out Parent PLUS Loans to lower the cost of college. Here are some upsides.

The Sky’s Almost the Limit

The government removed annual and lifetime borrowing limits from Parent PLUS Loans in 2013, so parents, if they qualify, can take out sizable loans up to the student’s total cost of attendance each academic year, minus any financial aid the student has qualified for.

Note that for any loans disbursed on or after July 1, 2026, new federal limits will apply. Rather than borrowing up to the cost of attendance (minus any other aid), parents can borrow $20K per year, or $65K total per student.

Fixed Rate

The interest rate is fixed for the life of the loan. That makes it easier to budget for the monthly payments.

Flexible Repayment Plans

Current options include a standard repayment plan with fixed monthly payments for 10 years, an extended repayment plan with fixed or graduated payments for 25 years, and income-based repayment plans.

•  Note that as of July 1, 2026, there will only be one available repayment plan, the standard fixed repayment plan. Income-driven repayment plans will be eliminated.

More College Access

PLUS Loans can allow children from families of more limited means to attend the college of their choice.

Loan Interest May Be Deductible

You may deduct $2,500 or the amount of interest you actually paid during the year, whichever is less, if you meet income limits.

Recommended: Are Student Loans Tax Deductible?

Cons of Parent PLUS Loans

Many Parents Get in Too Deep

The program allows parents to borrow without regard to their ability to repay, and to borrow liberally, as long as they don’t have an “adverse credit history.” (If they did have a negative credit event, they may still be able to receive a PLUS Loan by filing an extenuating circumstances appeal or applying with a cosigner.)

The average Parent PLUS borrower has more than $34,000 in loans, a financial hardship for many low- and middle-income families.

And if a student drops out, parents are still on the hook.

Interest Accrual

Parent PLUS Loans are not subsidized, which means they accrue interest while your child is in school at least half-time. You’ll need to start payments after 60 days of the loan’s final disbursement, but parents can request deferment of repayment while the student is in school and for up to six months after. Interest will still accrue during that time.

Origination Fee

The government charges parents an additional fee of 4.228% of the total loan.

Fewer Repayment Options

Parents who struggle with payments typically have access only to the most expensive income-driven repayment plan, which requires them to pay 20% of their discretionary income for 25 years, with any remaining loan balance forgiven. And parents must first consolidate their original loan into a Direct Consolidation Loan.

Fewer Repayment Options

Parents who struggle with payments can switch to the income-based repayment (IBR) plan, which requires them to pay 10-15% of their discretionary income for 20-25 years, with any remaining loan balance forgiven. Parents must first consolidate their original loan into a Direct Consolidation Loan.

•  Note that new Parent PLUS loans (and consolidation loans repaying Parent PLUS Lonas) issued on or after July 1, 2026, must use a standard fixed repayment plan (10–25 years, depending on loan balance). Income-driven repayment options will be eliminated for these loans. If you want to consolidate into the IBR plan, you must do so before July 1, 2026.

Options to Pay for College

Instead of PLUS Loans, private student loans may be used to fill gaps in need.

Private lenders that issue private student loans typically look at an applicant’s credit score and income and those of any cosigner. The lenders set their own interest rates, term lengths, and repayment plans. Some do not charge an origination fee.

You may want to compare annual percentage rates among lenders, and decide if a fixed or variable interest rate would be better for your financial situation.

Any time a student or parent needs to borrow money for education, a good plan is a good idea.

Sometimes scholarships can significantly reduce the amount of money that needs to be paid out of pocket for college, and personal savings and wages can also help. But it isn’t unusual for students to also need to take out loans.

💡 Quick Tip: Parents and sponsors with strong credit and income may find much lower rates on no-fee private parent student loans than Federal Parent PLUS Loans. Federal PLUS Loans also come with an origination fee.

Refinancing a Parent PLUS Loan

The goal of Parent PLUS Loan refinancing is to get a lower interest rate than the federal government is charging.

And student loan refinancing may allow children to transfer PLUS Loan debt into their name.

Refinancing could potentially lower your interest rate, which gives you the option to either:

•  Reduce your monthly payments

•  Pay the loan off more quickly, which may allow you to pay less interest over the life of the loan

Note that Parent PLUS Loans come with certain borrower protections, like the income-based repayment option and deferment options, that you would lose if you refinanced. Also note that if you refinance with an extended term, you may pay more interest over the life of the loan.

Eligibility for refinancing Parent PLUS Loans depends on factors such as your credit history, income, employment, and educational background.

The Takeaway

Millions of parents have used Federal Parent PLUS Loans to help pay for their children’s college education. In addition to Parent PLUS Loans, students can apply for scholarships, grants, and private student loans to help pay for college.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

How does the Parent PLUS Loan work?

The Parent PLUS Loan is a federal loan option where parents borrow money to help pay for their child’s college education. It covers tuition and other education-related expenses, with eligibility based on credit history. Repayment typically begins immediately, and interest rates are fixed.

Who is responsible for paying back a Parent PLUS Loan?

The parent who takes out the Parent PLUS Loan is responsible for repaying it. While the loan helps cover the child’s education expenses, the financial obligation lies solely with the parent, not the student. Repayment begins shortly after the loan is disbursed.

How long do you have to pay back Parent PLUS Loans?

Parent PLUS Loans typically have a repayment period of 10 years, with the first payment due about 60 days after the final disbursement. However, extended repayment plans of 25 years are also an option for those with more than $30,000 in Direct Loan debt.

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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. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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