Parent PLUS loans vs. private student loans: Which has better rates?

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Parent PLUS Loans vs. private loans: Learn how to decide which is best to pay for your child’s education. (iStock)

If your child’s financial aid doesn’t cover the full cost of their higher education, and you don’t want them to graduate with student loan debt, you may consider taking out loans yourself.

Parents willing to be primary borrowers on student loans have two main options: federal parent PLUS loans and private loans.

Parent PLUS loans generally offer more generous repayment plans, courtesy of the U.S. government. But if you have a solid credit score, private loans may help you save money in the long run.

To help you decide which option will work best for your family, here’s a full breakdown of parent student loans.

What is a parent PLUS loan?

Parent PLUS loans are student loans available through the U.S. Department of Education for parents of dependent undergraduate students to pay for their educational expenses. Parents are able to borrow up to the full cost of attendance, minus any other financial aid the student receives. These loans have fixed interest rates.

What is a private student loan?

Private student loans are issued by private lenders to pay for higher education. They’re not backed by the U.S. government.

Each lender will have its own guidelines for who is eligible and terms can vary. Some lenders have specific student loan programs for parents who want to help pay for their child’s college education.

You can learn more about private student loans, and compare rates from multiple lenders, through Credible.

Parent PLUS loans vs. private student loans

Parent PLUS loans and private student loans have a number of similarities but some key differences as well. We’ll go into more detail on these later on but here are some of the main ones to consider.

  • Primary borrower — In both cases, the parent of a dependent undergraduate student is typically the primary borrower. But federal parent PLUS loans are strict about it — only biological or adoptive parents are eligible (grandparents are not). Many private parent student loan programs allow anyone to borrow on behalf of a student.
  • Lender — The federal government is the lender on parent PLUS loans. Private companies issue private student loans to parents.
  • Cosigner requirement — Parent PLUS loans may require a cosigner, while private loans for parents typically don’t. Parent PLUS loans require an "endorser" if the parent has things like significantly overdue loan balances or bankruptcies in the recent past. Private parent loans generally go to borrowers with healthy credit, and it might be difficult to qualify for one with less-than-perfect credit. But some programs do allow cosigners.
  • Interest rate type — Parent PLUS loans offer only fixed interest rates. Private loans may be either fixed-rate or variable-rate loans.
  • Repayment term — The repayment periods on federal PLUS loans differ based on your repayment plan. Standard repayment plans have 10-year terms, though extended repayment plans are available for up to 25 years. Private loans typically have terms between five and 15 years.
  • Origination fee — Parent PLUS loans have an origination fee of 4.228%. While private lenders may charge fees if they want to, many don’t.

Cost comparison of parent PLUS loans vs. private student loans

Lifetime costs are another significant difference between parent PLUS and private student loans.

Parent PLUS loans carry a fixed interest rate. Rates on private student loans for parents vary and can be either fixed or variable. Typically, if you have excellent credit, you can get a lower interest rate on a private loan than you might get on a parent PLUS loan. That means you’ll pay significantly less on a private loan over time.

Here’s an example comparing the total costs of a parent PLUS loan versus a private student loan for parents from the lender College Ave, a Credible partner. For sake of comparison, we’ll stick to fixed interest rates, a standard repayment plan with a 10-year repayment term.

Parent PLUS loan: $25,000 (principle) + $1,057 (loan fee) + $8,729.52 (total interest cost at 6.28%) = $34,786.52

College Ave private parent loan: $25,000 (principle) + $0 (loan fee) + $4,441.33 (total interest cost at 3.34%) = $29,441.33

In this scenario, you can see the parent who borrows from College Ave will save $5,345.19 in interest costs over the life of the loan.

If you have excellent credit, you’ll likely pay significantly less for a private loan. But there are plenty of scenarios in which parent PLUS loans can be a better deal.

If you don’t have excellent credit, you might not qualify for a private lender's best rates. Their offer may be higher than the fixed rate on a parent PLUS loan. Parent PLUS loans also offer longer repayment terms, which reduces the monthly payment. You might need that to fit into your budget.

When parent PLUS loans or private student loans might be best for you

The best loan for you will depend heavily on your personal financial situation, and it may be worth exploring both options before deciding on a loan to fund your child’s education. Here are a few situations in which one is typically better than the other.

Situation one: If you have fair credit

If your credit score falls in the fair range, you likely won’t qualify for a private lender’s best rates. It could be worth getting a rate quote from a few private lenders and comparing them to the set-in-stone rate from the federal government.

Situation two: If your monthly budget is tight

You’ll want to take into account more than the total cost of borrowing when you’re evaluating student loans. The monthly payment makes a difference, too. Because of the different term lengths and interest rates, either a private loan or a federal parent PLUS loan may offer a lower monthly payment depending on your financial situation. It’s worth running the numbers to see.

Situation three: If you want to make payments while the student’s in school

Federal parent PLUS loans and many private loans don’t require any payments until the loan is fully disbursed. However, both also allow parents to get ahead by making some payments while the child is in school. These can be interest-only payments on PLUS loans or interest-only or full principal-and-interest payments on some private loans. Depending on your budget, one or the other might work better for you.

Credible makes it easy to compare rates from multiple private student loan lenders.

When parent PLUS loans might be the best student loan option

The best loan for you always depends on your individual needs and financial situation. But if you have fair or poor credit, parent PLUS loans are more likely to be the better deal.

The federal government charges a standard 6.28% fixed interest rate for all who qualify. This is significantly lower than the upper ranges of rates you’ll find at private lenders, who typically apply their highest rates to borrowers with lower credit scores.

It’s also easier to be approved for a parent PLUS loan than a private one. If you have some adverse credit history, you still might qualify for a PLUS loan if you bring along an endorser or can make your case to Uncle Sam that there were extenuating circumstances.

Pros of parent PLUS loans

  • Set, fixed interest rate — You know exactly what you’ll pay when you’re taking out a parent PLUS loan. The rate doesn’t change based on your credit score, and it will be fixed for the length of the loan.
  • Several repayment options — You can choose to go with a standard, 10-year repayment plan, choose an extended plan of 25 years, or go with a graduated repayment plan that offers lower monthly payments at the beginning.
  • Can consolidate loans — Parent PLUS loans are eligible to be consolidated into a single Direct Consolidation Loan. This leaves you with a single monthly payment and makes you eligible for an income-contingent repayment plan that might save you money.

Cons of parent PLUS loans

  • Higher interest rate — Parent PLUS loans have the highest rates of all the federal student loan programs and may be higher than what you can qualify for with a private lender.
  • Origination fee — Parent PLUS loans have a mandatory fee equal to 4.228% of the loan amount. Private lenders often don’t charge fees.
  • Only parents can qualify — Only biological or adoptive parents can qualify for a parent PLUS loan for their child. Grandparents, other relatives or family friends can’t.

When private lenders might be the best student loan option

If you have an excellent credit score and no trouble qualifying for a loan, a private student loan will generally be your best option. The best interest rates on these loans are significantly lower than that of a parent PLUS loan, meaning you’ll save thousands of dollars in the long run going the private route.

Private loans may also be the better option if you’re looking to pay off the loan more quickly, as they typically offer shorter repayment terms. Private lenders also offer variable interest rates, which aren’t available on parent PLUS loans. If your plan is to take advantage of lower variable rates and later refinance, private loans are the way to go.

Pros of private student loans

  • Lower interest rates available — The best interest rates on private student loans are lower than the rate the government charges. If you have a strong credit history, you’ll get a much better deal with a private loan.
  • Little to no loan fees — Many private student lenders offer zero fees, unlike the parent PLUS program.
  • Save money with refinancing — You may be able to refinance your private student loans down the line at a lower rate, saving you money.

Cons of private student loans

  • Harder to qualify for — If you have poor credit, you might not qualify for a private student loan. But some lenders may accept a cosigner with good credit.
  • Higher interest rates possible — If you have a credit score on the lower end of a lender’s criteria, the interest rate you’re offered may be higher than the standard rate charged on a parent PLUS loan.
  • No special repayment programs — Private student loans for parents don’t offer extended repayment periods or income-contingent plans like those you may be able to get with a federal loan.

Important considerations

Before you make any decisions about student loans, it’s important to complete the Free Application for Federal Student Aid (FAFSA). And be sure you’ve exhausted all your federal student loan options before turning to private student loans.

Research student loan interest rates so that you understand what rate you may qualify for. Be sure to compare APR, not just interest rates, because annual percentage rate gives you a better picture of a loan’s total cost.

Read, and ask questions, about all of a lender’s terms and conditions before signing for a loan. The documentation can help you understand if a loan has prepayment penalties or other fees.

Get your prequalified rates and learn more about student loans when you use Credible to research private student loan lenders.