The Differences Between Parent PLUS Loans and Private Student Loans for Parents

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You’ve done it. You raised your kid right, supported them through the admissions process, and now they’re finally headed off to college. But after the initial thrill fades, you might realize you’re now stuck with a new hurdle: figuring out how to pay for their education.

Not all families can afford to send their child to school on savings alone. Instead, most rely on a combination of scholarships, savings, and student loans. But even that isn’t always enough. Many parents also end up taking out loans in their own names, too. In early 2024, about 3.6 million parents had federal Parent PLUS Loans, one of the most popular types of loans for parents. The only catch? Parent PLUS Loans are also one of the most expensive federal loan options. That can make private loans¹ an appealing alternative. So, what are the differences between Parent PLUS loans and private student loans for parents? When does it make sense to choose one over the other? Here’s what you need to know.

Read more: How Much Does College Cost?

What Are Parent PLUS Loans?

A Parent PLUS Loan is a type of federal education loan reserved for the parents of dependent undergraduate students. You’ll typically have to begin repaying the loan as soon as the full loan amount is disbursed. Like other federal loans, PLUS Loans come with a fixed interest rate and are eligible for a number of repayment plans.

Unlike federal undergraduate student loans, Parent PLUS Loans require a credit check. This is the government’s way of investigating your creditworthiness and making sure you’re likely to pay your debt on time. So, to qualify for PLUS Loans, you’ll need a good credit score. If you have adverse credit history — like a foreclosure or bankruptcy in your past — you may need to get someone with better credit to endorse your Parent PLUS Loan for you. (An endorser agrees to pay the loan if the primary borrower fails to do so, similar to a cosigner on a private student loan.)

Do You Qualify for Parent PLUS Loans?

No matter your financial situation, the first step for parents and college-bound students is completing the FAFSA, or the Free Application for Federal Student Aid. This form will ask for your family financial information and use that to determine how much your child is eligible to receive in financial aid. The ultimate award offer your child receives will be based on their school’s cost of attendance and other factors.

In addition to telling your child what kind of loans they qualify for, the FAFSA will also tell you whether you’re eligible to borrow through the federal government’s Parent PLUS Loan program. However, do not automatically assume these federal loans are the best borrowing option for parents. In some cases, it could make more sense to go through a private lender instead.

Disadvantages of Parent PLUS Loans

Parents PLUS loans are among the priciest federal student loans. Here are a few of the major drawbacks to consider.

• High interest rates and fees

Parent PLUS Loans typically have higher interest rates than other federal Direct Loans. Right now, they’re at a 30-year high. Starting in the 2024/25 academic year, Direct PLUS loans for parents will come with a 9.08% fixed rate. That’s the highest this rate has been since 1992.

PLUS Loans also come with an origination fee. Historically, that fee has been around 4.2% of the loan amount. That can add up fast.

• Limited rate options

Federal loan interest rates are always fixed. You won’t have the option to choose a variable interest rate like you would with a private lender.

• Graduate students don’t qualify

To qualify for Parent PLUS Loans, your student will need to be an undergrad. Graduate students will have to take out their own loans through the Graduate PLUS program.

• Loan forgiveness is harder to get

Though Parent PLUS Loans qualify for some flexible repayment terms, they’re not typically eligible for loan forgiveness. If you do want to try to apply for loan forgiveness, you’ll have to go through the federal student loan consolidation process first.

• Repayment starts right away

Undergraduate students don’t have to begin loan repayment until well after they graduate. But parents with PLUS loans are expected to start paying as soon as the disbursement process is complete. That said, parents can request a deferment while their child has at least half-time enrollment at an eligible school. If you qualify, you can wait until after a six-month post-graduation grace period before you start making payments.

Potential Benefits of Parent PLUS Loans

The one benefit Parent PLUS loans have in common with other federal student loans is that they‘re eligible for federal borrower protections. These include deferment and forbearance options, as well as access to federal loan consolidation. Consolidation can help parents secure a longer term and lower monthly payment if their student loan bills start to feel overwhelming.

Parent PLUS Loans are also eligible for standard repayment plans and extended repayment plans. However, they’re only eligible for one of the Department of Education’s income-based repayment programs. This program, called “income-contingent repayment,” caps payments at 20% of your monthly discretionary income and offers forgiveness after 25 years.

What are Private Student Loans for Parents?

With private student loans, you borrow a lump sum of money from a private institution — like a bank, credit union, or online lender — instead of from the federal government. Some private lenders offer loans specifically for the parents of dependent students. These are sometimes called “private parent loans,” or simply “private student loans for parents.”

With private parent loans, you can usually choose between a fixed interest and a variable interest rate. Some lenders also let you choose from a variety of repayment options so you can select a loan term and payment plan that works for your schedule.

The Benefits of Private Parent Loans

Private loans can be a good alternative for parents who want to help pay for their child’s college education but don’t want to deal with the federal government’s steep interest rates or fees. Here are a few of the main advantages.

• Low-interest rates

With private loans, your rate will be based on your financial profile. So, if you have excellent credit, you may qualify for lower interest rates. In some cases, these may be lower than what the government offers on its Parent PLUS loans. Rates for private student loans vary so it’s best to check each lender’s website for their latest parent loan rates before you fill out a loan application.

• No origination fees

This is where you can save the most money. Many newer private student loan lenders do not have origination fees. That means you could save hundreds if not thousands of dollars right off the bat by going with a private student loan over a Parent PLUS Loan.

• More flexible eligibility criteria

Some lenders may also permit borrowers other than the student’s immediate parents to take out private parent loans. With federal student loans, only parents — or grandparents who have legally adopted the student — can take out Parent PLUS Loans. But with private lenders, other members of the student’s extended family may be able to borrow money on their behalf.

• Choice between fixed and variable rates.

Borrowers who take out private parent loans also typically have a choice between fixed or variable-rate loans. With fixed-rate loans, you’re locked into the same rate over the life of the loan. But with variable-rate loans, your interest rate — and therefore your loan payment — can go down if national interest rates drop.

• Easy path to refinancing

If your credit improves after you take out a private student loan, you can often refinance that loan² with the same lender for an even lower rate. While it’s possible to refinance federal loans, refinancing a private loan with the same lender is often quicker and easier. Some private lenders also offer rate discounts for existing customers — which could set you up to score even lower rates later³.

Potential Drawbacks of private student loans for parents

With private parent loans, you could gain access to lower interest charges, variable rates, and flexible repayment terms. That said, private loans are not for everyone. If you don’t have good credit, you may not be able to qualify for a lender’s lowest rates. And if you expect to be eligible for Public Service Loan Forgiveness (PSLF) or another national loan forgiveness program, federal loans may be a better option. Federal borrowers also have access to income-driven repayment plans and other government relief programs.

If you don’t expect to need these federal protections, however, private student loans for parents can often be a great alternative to pricey federal loans.

Save with a Private Parent Loan from Earnest

There are two main types of loans for parents of undergraduate students: federal Parent PLUS Loans, and private parent loans. Parent PLUS Loans often come with high rates and fees — which makes private student loans for parents an attractive alternative.

Ready to look into your options? At Earnest, we never charge origination fees or any other loan fees. We also offer a significant rate discount to parents who sign up for autopay. No matter your personal finance situation, we can help you find a loan that suits your needs. Check your rate today to see how much you could save.

This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

¹ Before applying for private student loans, it’s best to maximize your other sources of financial aid first. It’s recommended to use a 3-step approach to assembling the funds you need: 1) Look for funds you don’t have to pay back, like scholarships, grant, and work-study opportunities. 2) Next, fill out a FAFSA(R) form to apply for federal student loans. Federal Direct subsidized and unsubsidized loans, excluding PLUS Loan for Parents and PLUS Loan for Graduate and Professional Students which require a credit check and a credit worthy endorser if the parent or graduate or professional student has adverse credit, do not require a credit check or cosigner, and offer various protections if your struggling with your payments. 3) Finally, consider a private student loan to cover any difference between your total cost of attendance and the amount not covered in steps 1 and 2. For more information, visit the Department of Education website at https://studentaid.gov/.

² Please note that you may lose benefits associated with your underlying federal loans, such as federal Income-driven Repayment Plans (an example of which is the SAVE plan), Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options, if you refinance into a private loan. If you file for bankruptcy, you may still be required to pay back this loan.

³ Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for the total cost of your refinanced loan.