How Do Parent PLUS Loans and Private Loans Compare?

September 21, 2021

How Do Parent PLUS Loans and Private Loans Compare?

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Parents can pay for their child's college education in many ways, including loans. The federal government offers parents unsubsidized and subsidized parent PLUS loans. These loans apply only to undergraduate education. They cover education-related expenses, such as tuition, fees, and housing. Like other federal financial aid programs, parent PLUS student loans require the FAFSA results.

Banks and other private lenders also offer parent loans for college. These institutions may offer better interest rates than federal loans. These rates depend on borrowers' financial histories. However, private loans' variable interest rates may rise unexpectedly. This can increase out-of-pocket expenses. Most private lenders do not offer unsubsidized loans.

This page explains the differences between private and parent PLUS loans. Read on to learn how to apply for both. You can also review answers to typical questions. Click on the links in the final section for information from outside resources.

Parent PLUS Loans vs. Private Loans

Prospective borrowers should compare parent PLUS loans and private parent loans for college. Both loan types award only the funds learners need to cover attendance costs.

Parent PLUS loans and private loans have differences that may affect repayment. Private loans may offer a low introductory variable interest rate that rises over time. Federal loans require the FAFSA results annually. Fees and repayment options also vary. See the chart below for details. You can also visit the Federal Student Aid website to learn more.

Parent PLUS Loans

  • Primary Borrower: Parent of a dependent student
  • Interest Rate: 6.28% for 2021-22
  • Interest Rate Type: Fixed
  • Maximum Loan Amount: Up to the school's cost of attendance minus other financial aid
  • Cosigner Required: An endorser is required for adverse credit history
  • FAFSA Required: Yes
  • Loan Term: 10-25 years
  • Origination Fee: 4.228% for loans disbursed by October 1, 2020, and before October 1, 2022
  • Repayment Options: Standard, graduated, and extended repayment plans

Private Loans

  • Primary Borrower: Parent or student
  • Interest Rate: Varies by lender
    Variable rate starts at 0.99%
    Fixed rate starts at 2.99%
  • Interest Rate Type: Fixed and variable
  • Maximum Loan Amount: May vary by lender but typically up to the school's cost of attendance minus other financial aid
  • Cosigner Required: A cosigner may be required
  • FAFSA Required: No
  • Loan Term: 5-25 years
  • Origination Fee: Varies by lender
  • Repayment Options: Varies by lender

The Application Process for Parent PLUS Loans and Private Loans

What to Consider When Comparing Parent Loans

When comparing parent PLUS loans vs. private loans, students should consider many factors. These include loans' interest rates, fees, and eligibility. They should also know what happens after missing a payment. Agreeing to a loan without this information may lead to negative financial consequences. Borrowers can find answers on lenders' websites or by contacting a representative.

Interest rates impact how much borrowers repay over a loan's life. The federal government charges 0% interest in response to the COVID-19 pandemic. This policy helps borrowers and should remain in effect until Jan. 31, 2022.

Private lenders set their interest rates independently. They offer the lowest rates to borrowers with a strong credit history.

Parent PLUS loans offer a fixed interest rate. This allows borrowers to create a long-term repayment plan. Private lenders may provide a lower fixed interest rate to borrowers with good credit. Only private lenders use variable interest rates.

An initial variable interest rate may save borrowers money compared to federal loans. But rising rates may make these loans more expensive over time.

As of September 2021, the federal government charges a 4.228% origination fee for new parent PLUS loans. Borrowers pay this fee before receiving the loan. Private lenders' fees vary. Private lenders may also charge fees if borrowers miss loan payments. Borrowers should contact their private lender about repayment plans so they do not miss a payment. Both private lenders and the federal government use applicants' credit scores to make loan determinations. However, a low credit score does not automatically disqualify borrowers from federal loans. The government considers extenuating circumstances and allows endorsers to cosign the loan application. Private lenders may not offer these options. Some borrowers cannot repay their federal or private loans. They should contact their lender before missing a payment deadline. Some parents with a federal loan transfer it to their child. Borrowers can also change repayment plans or request postponing payments. Private lenders may offer similar options.

What Happens to Parent PLUS Loans if You Die?

The federal government allows for loan dischargement if the parent or student dies. Requirements include proof of death, such as a death certificate. The government also accepts a photocopy. Borrowers should contact their loan servicer to begin the discharging process.

The law does not require private lenders to discharge loans due to death. However, about half of lenders do so. Loans taken out on or after November 20, 2018 release cosigners automatically.

Are There College Tuition Loans for Parents with Bad Credit?

Prospective borrowers with poor credit face challenges when exploring private and federal loans. Some private lenders may use a credit score cutoff. Others may offer less financial assistance to borrowers with bad credit. Federal loans use less strict requirements. Applicants should apply for federal loans before private loans.

Borrowers with bad credit can get a cosigner or endorser with better credit. A cosigner agrees to cover loan payments if the person taking out the loan cannot pay. Borrowers can also explain extenuating circumstances, such as prior bankruptcy or liens.

Can Parent PLUS Loans Be Written Off on Your Taxes?

As of September 2021, the federal government allows parent PLUS loan borrowers to deduct up to $2,500 of interest payments annually. Borrowers who paid more than $600 in interest payments receive Form 1098-E at the end of the tax year. This form reports interest payments. Borrowers input this information when filing their taxes.

This deduction applies to all qualified student loans. The IRS defines a qualified student loan as one in which the borrower made all mandatory payments in the prior tax year. Other requirements include not filing separate tax returns, if married. These borrowers must also not qualify as a dependent on someone else's tax return.

Student Loan Resources

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