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How do Parent PLUS loans and parent private loans compare?

December 13, 2018

If you need to borrow money to finance your child’s college education, you may be wondering about the differences between Parent PLUS loans and loans issued by private lenders.  The biggest fundamental difference is that private loans offer none of the protections and flexible repayment options provided by the U.S. Department of Education for federal loans.  A few of the programs and benefits associated with federal student loans, but not typically offered by private lenders, include:

  • Loan forgiveness programs;

  • Income-based repayment programs;

  • Loan consolidation programs; and

  • Financial hardship provisions such as deferment and forbearance.


Although federal protections are forfeited, borrowing from a private lender may still be an attractive low-cost option, especially for parents with excellent credit histories.  Below is a comprehensive analysis of each aspect worth considering for federal PLUS and private student loans.


Credit Requirements

Whether you borrow from the federal government or a private lender, you will be required to pass a credit check.  The U.S. Department of Education generally has less stringent credit requirements than most private lenders, so if you have poor credit but no adverse credit history, then obtaining a Parent PLUS loan may be your best option.  (Pro tip: even with an adverse credit history, you can still qualify for a PLUS loan.)  However, if you have good or excellent credit, a strong credit report and excellent repayment history, and a debt-to-income ratio below 30 percent, then you likely qualify for very attractive repayment terms with a private lender.  In addition, if your credit is marginal, then many private lenders will allow you to utilize a cosigner to secure better repayment terms.


Interest Rates

Interest rates on Parent PLUS loans are always fixed, and set by the Department of Education on an annual basis.  Interest rates on PLUS loans typically range from six to eight percent. Private lenders frequently offer variable interest rates, which start low and increase over time.  Variable-rate private loans should be considered very cautiously, with careful attention paid to the schedule for interest rate increases. With many private lenders, borrowers have the option of negotiating a lower interest rate in exchange for committing to a shorter repayment term, such as five years.  If you can afford to do so, committing to a short repayment term with a low fixed interest rate is an excellent option for minimizing your total interest expense. In addition, if you already have a checking or other account with a prospective lender, then you can often negotiate for a better interest rate.  Many private lenders also offer discounted interest rates for enrolling in autopay programs. Above all, when considering loans from private lenders, remember that interest rates and other terms are always negotiable. Ask and you shall receive!



Fixed Rate for Parent PLUS Loans

Direct PLUS Loans first disbursed between 7/1/2018 and 7/1/2019

7.6%

Variable Annual Percentage Rates for private student loans available to parent borrowers:

Citizens Bank

4.26 - 12.13%

College Ave

3.94 - 12.78%

CommonBond:

3.93 - 9.81%

Wells Fargo

5.99 - 12.49%


 

Loan Origination Fees

The federal government assesses a loan origination fee on PLUS loans.  The rate varies annually but is typically just over 4%. This is more than twice the origination fee normally charged by private lenders, which generally charge closer to 2%.


Borrowing Limits

Annual and aggregate borrowing limits are imposed on both federal and private student loans.  Every eligible education institution annually defines its cost of attendance, which constitutes the upper borrowing limit, minus other financial aid received, for PLUS loans.  Private lenders also utilize schools’ cost of attendance figures in determining maximum borrowing amounts; however, they are free to set their own specific rules and limits.  


Other Considerations

What else?  Another difference between federal and private student loans is that federal loan programs do not allow you to involve your child as a cosigner, while many private lenders will.  In addition, as a parent borrower, you are not permitted to obtain a PLUS loan to finance your child’s graduate or other advanced degree. Parent PLUS loans are only available to fund a child’s undergraduate education.

 

Your Next Steps

Need more information on the options available to you?  The best way to consider your specific alternatives is to request rate estimates from private lenders, in addition to researching all the requirements for Parent PLUS loans.  Private lenders can provide interest rate estimates by performing soft credit checks that don’t impact your credit score.  Once you have several different offers in front of you, then you will be well-equipped to make a prudent, informed decision.