With all of the options available for financing your education, trying to tell the difference between them can be a bit confusing. The student loan offerings alone can feel like you’re navigating a minefield. What are the differences between the various programs? And how do you know which is the best? Parent PLUS and private student loans are two products that often broker questions from students and parents alike.
The Parent PLUS Loan
The PLUS loan is a federal program directed at parents instead of students. It’s different because the parent is the responsible party, not the student. To be eligible for the Parent PLUS, you must be the biological, adoptive, or stepparent of a student attending an eligible school at least half-time.
You – and your student – also need to meet the basic criteria for all federal student loan programs. You must be a U.S. citizen, possess a green card, or have refugee status. You also need a Social Security number or visa.
Unlike some other federal loan programs, you also need a solid credit history. If you can’t meet those criteria, you might still be able to get a Parent PLUS loan with an endorser – basically a cosigner – who is not the student. If your adverse credit is due to extenuating circumstances, you can also submit documentation verifying that.
A Parent PLUS loan is meant to fill any gaps in the financial aid package, so the maximum allowable loan amount is the school’s cost of attendance minus any other aid. Funds are paid directly to the school first to cover remaining costs; after those are covered, any additional loan proceeds will go to you and the student.
When you take out a Parent PLUS loan, expect to also pay some fees. Each loan charges a fee of 4.264 percent of the total loan amount. For example, on a $10,000 initial loan, you’ll end up borrowing $10,426.40, but you'll only receive $10,000 of proceeds. The interest rate on a PLUS loan is currently a flat 7 percent APR, fixed for the life of the loan.
Once the loan is disbursed, you’re expected to start paying it back – but you can change your repayment plan to lower your payments, or defer full payments until your student is finished with school. You could even qualify for income-based repayment. You cannot, however, transfer responsibility for the loan to the student; it will stay in your name until it is paid off.
Private Student Loans
Private student loans are just what they sound like – student loans offered by private financial companies and institutions instead of the federal government. Hundreds of options exist, across many different companies, and all have varying interest rates, fee schedules, and repayment terms.
Most private loans must be taken out by the student, although parents are often included as cosigners for student borrowers without a solid credit history or steady income. Some have relaxed approval criteria that look at factors other than just creditworthiness – such as grades – that open up options for hardworking students without a credit history. A few programs, such as SoFi’s loans, allow parents to borrow in the same way as a Parent PLUS loan.
Interest rates range along a much bigger spectrum as well. While some loans are quite a bit lower than a Parent PLUS loan, your rate could end up being much higher. While each financial company has their own rate range, your individual loan rate is based upon their loan criteria, whether you have a cosigner, and other factors. It’s best to research any loan options thoroughly before applying to see if your situation might result in a higher rate.
When it comes to repayment plans, private loans often have shorter terms than a federal loan – many have five, seven, or ten year terms, which can mean higher payments than other federal programs. In addition, by taking out a private loan you give up the repayment programs available with a federal loan, such as income-based repayment plans and staggered payments.
If you have problems paying the loan back, private companies don't typically offer you deferments and forbearances like a federal program can. Most companies, however, do have other options available, such as a refinancing option to a lower payment, but those can get expensive over the long term.
There is no cut-and-dry answer to which type of student loan is better. Do your own research, match your particular situation to the best company, and plan your education funding with more than just the short-term in mind.