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Updated on Thursday, March 29, 2018
College and graduate students may have several options when it comes to paying for school, including federal student loans that don’t depend on the student’s income or credit, or the family’s financial situation.
However, sometimes a student hits the federal loan limit and still needs money for school or living expenses. Parents who want to help shoulder some of the financial burden also have options. They may be able to take out a federal parent PLUS loan after their child submits a Free Application for Federal Student Aid (FAFSA), or apply directly with a private lender, and use the money to pay for a student’s educational expenses.
In this guide, we’ll explain everything you need to know about parent loan options.
Private vs. federal: Which is the right choice for you?
You have two choices in parent loans, federal parent PLUS loans or a parent loan from a private student lender. In either case, the loan will be in your name (rather than the student’s), there’s a credit check and you’ll be responsible for repaying the debt. However, there are important differences to consider.
Eligibility: The parent PLUS loans have a credit check which looks for an adverse credit history, such as a recent default, foreclosure, repossession or bankruptcy. However, parent PLUS loan eligibility isn’t dependent on a credit score or the applicant’s income or other debts that are in good standing. And every borrower during a given loan disbursement period receives the same fixed interest rate and pays the same disbursement fee.
Private student loans are also credit-based, and the lender may have a more rigorous underwriting process than what you undergo for a federal student loan. Your eligibility for a loan could depend on your income, debts, credit history and credit score, and these can also affect your interest rate.
Cost: While private student loans often don’t charge disbursement or origination fees, your annual percentage rate (APR), which is the cost of borrowing inclusive of fees, could be higher with a private student loan than a parent PLUS loan. On the other hand, especially creditworthy borrowers may find private student loans are a much less expensive option.
Terms and benefits: In addition to the cost of borrowing, you may want to consider the loan’s term, repayment plans and benefits. For example, a federal parent PLUS loan will be discharged if the student dies. The policies may vary from one private lender to another, and depending on the servicer that the lender partners with to collect loan payments.
Flexibility: Also, consider your options if you’re having trouble making payments later. You may be able to put a parent PLUS loan into forbearance and temporarily stop making payments. There are different repayment plans that can lower your monthly payments, and private lenders may vary their policies and offerings.
Parent PLUS loans: Explained
Parent PLUS loans are a subtype of direct PLUS loans, which are part of the U.S. Department of Education’s William D. Ford Federal Direct Loan program. The department offers direct PLUS loans directly to graduate and professional degree students and parents of dependent undergraduate students. Sometimes these loans are called grad PLUS loans.
Parent PLUS loans have a fixed interest rate and disbursement fee for all borrowers, although it may vary from one year to the next.
Parent PLUS loan rates
Interest rates for loans disbursed July 1, 2018 to June 30, 2019
Disbursement fee for loans disbursed on or after Oct. 1, 2017 to Sept. 30, 2018
Annual and aggregate loan limits
Cost of attendance minus the student’s other financial aid.
Unlike some types of federal student loans which limit how much you can borrow each year, or aggregate, parent PLUS loans don’t have a preset limit. However, you’re still limited to the school-determined cost of attendance for the student, minus other financial aid that the student received.
To qualify for a parent PLUS loan, you must meet these requirements:
- Your child must complete the Free Application for Federal Student Aid (FAFSA).
- You meet the basic eligibility requirements for federal student aid.
- You can’t have an adverse credit history.
- You must take out the loan on behalf of a biological or adoptive child. Stepchildren may also qualify, in some cases.
The student you’re borrowing money for also must meet the eligibility guidelines for federal aid and must be taking at least a half-time course load at an eligible school. Your child also has to be a dependent student as determined by the education department, which uses different guidelines than tax-related dependency status.
If you don’t qualify for a parent PLUS loan due to having an adverse credit history, you may still be able to still take out a parent PLUS loan if you add an eligible endorser (similar to a cosigner on the loan) to the loan. The endorser will have to repay the loan if you’re unable to make payments in the future.
You may also qualify if you can prove that the there’s an error in your credit reports that led to the adverse credit, or if there are extenuating circumstances related to your adverse credit. For example, if you have adverse credit due to recent foreclosure, you may be able to qualify if you sold the home with a short sale and can prove the sale was approved and completed.
If you’re qualifying for a parent PLUS loan because of an endorser or extenuating circumstances, you’ll also need to take an online PLUS Credit Counseling session. All borrowers are required to take an online entrance counseling course.
How to apply for a Parent PLUS loan
Fill out the FAFSA. To take out a parent PLUS loan, your child will need to complete the FAFSA, which you can find on FAFSA.gov. You’ll need to share some information for FAFSA, including your Social Security number, tax and some financial information. MagnifyMoney has a guide to filling out the FAFSA, and the education department offers shares helpful information and guides online.
Resubmit FAFSA each year. Your child will need to resubmit the FAFSA each year to remain eligible for federal financial aid, and for you to qualify for parent PLUS loans.
For students beginning their first year at school, they’ll hear back from all the schools that received their FAFSAs with financial aid offers. Otherwise, they’ll just get a response from their current school. The award letter will list the types of aid the student is eligible for and maximum loan limits.
Review your financial award letter. The next step can vary from school to school, so you should reach out to the school’s financial aid office if it hasn’t already given you instructions on how to request a PLUS loan.
Your child’s award letter may list a parent PLUS loan, but even if it doesn’t, you could still be eligible for a parent PLUS loan. On the other hand, even if a parent PLUS loan is on the award letter, you’ll still need to meet the eligibility criteria to qualify for the loan. In either case, you may need to apply for the loan on StudentLoans.gov.
Complete your paperwork. If you qualify, you’ll also need to sign the direct PLUS loan Master Promissory Note. If you’re not able to get a parent PLUS loan, your child may be eligible for additional direct unsubsidized loans.
Repaying a parent PLUS loan
How PLUS loans are disbursed: The education department disburses (sends) the money you borrow with a parent PLUS loan to your child’s school to cover his or her expenses, such as tuition and fees. If the parent PLUS loan is for more than your child’s outstanding expenses, the school will send you a refund for whatever is left over. You can alternatively authorize the school to send the money to your child.
Making payments: Parent PLUS loans have a standard 10-year repayment plan and you may need to start repaying your loan after the last disbursement. You can also apply to defer your loan for as long as your child is enrolled at least half time at an eligible school, and for the six months after he or she leaves the school. However, your loan will accrue interest during this period, which could add to your total cost of repaying the loan.
Repayment plan options: In addition to deferring the loans, you may be able to switch to a different repayment plan. Changing plans to the extended repayment plan will increase your loan’s term and lower your monthly payments. You can also switch to the Income-Contingent Repayment plan after consolidating your parent PLUS into a direct consolidation loan. The ICR plan bases your monthly payments on your income, family size and where you live.
Liability: Some parents have an arrangement with their child where the child helps repays the parent PLUS loan. However, because you took out the loan in your name, legally you must repay the money. Children won’t be able to take legal responsibility for a parent PLUS loan, even after they graduate, unless they apply for student loan refinancing from a private lender that lets them include a parent’s loan.
Private student loans for parents: What are your options?
Similar to parent PLUS loans, some private student lenders offer student loans to parents who want to help finance a child’s education. These are credit-based loans, and each lender may have different underwriting requirements and loan offerings. Therefore, if you’re considering a parent loan from a private student lender, you may want to compare lenders and their loans’ terms.
Where to find private parent loans
Parents can find private parent loans from banks, credit unions and student loan companies. The five companies featured here are among the largest national private student loan lenders that offer loans specifically for parents who want to finance a student’s education.
There’s no single company that’s best for every parent borrower, nor is there one lender that will always offer you the lowest APR. Even the lender with the lowest advertised APR might offer you a higher rate than a different lender. However, there may be other requirements or features, such as the minimum loan amount or repayment plans, that make one lender a better fit for your situation.
Pre-approval with private parent loans
Some private lenders let you apply for loan pre-approval with a soft credit inquiry, which won’t affect your credit score. If you’re pre-approved, you may see an estimated APR, or APR range, which could help you decide between lenders.
When you decide to take out a loan, you’ll need to agree to a hard credit inquiry and will then see your official loan offers. You can still decide to turn down the loan and keep looking if you want.
A hard credit inquiry could hurt your credit score. However, multiple hard credit inquiries from student loans get treated as a single inquiry for credit-scoring purposes when they occur within a 14-day period. Since you’ll eventually have to agree to at least one hard inquiry to take out a private parent loan, you may want to apply with several lenders (including those that don’t offer a soft credit inquiry pre-approval) once you’re ready to take out a loan.
Private parent loans options
All of these rates and loan terms are current as of March 26, 2018, and may include a 0.25% autopay discount.
5 or 10 years
Loan balance range
$5,000 to the cost of attendance
No application, disbursement, origination or prepayment fees.
Interest rate discount
0.25% with autopay
Soft credit check
Alternatives to parent loans
Some parents may want to help pay for a child’s education but don’t want to take out a parent loan or are having trouble getting approved for a student loan with a good rate.
Here are a few alternatives options you can consider.
Max out federal aid
Whatever you do, you and your student’s first step should always be to max out the federal student aid options, from grants to student loans. These options are nearly always the best bet financially, because they come with more flexible loan terms, repayment plans and typically have lower rates than what you’ll find from private lenders.
If you still feel the need to seek additional sources of aid, here are some alternatives:
A personal loan
Personal loans are unsecured loans that you can take out for almost any purpose. However, check the lender’s restrictions as some loan companies specifically state you can’t use a personal loan for educational expenses.
A personal loan may be a good idea if you want to receive the money directly rather than have it sent to your school. And personal loans may be easier to get discharged during a bankruptcy. But those two potential pros are outweighed by many cons.
Personal loans may have a much higher interest rate than student loans. If you have poor credit, the APR could be over 30% and you may have to pay origination fees that can eat into how much money you receive. Those with poor credit may be able to get a much lower interest rate with a federal parent PLUS loan, which doesn’t have a minimum credit score. And they’ll have access to federal loan repayment programs and benefits in case they have trouble making payments later.
Those with good-to-excellent credit may get a lower rate with a private student loan. Although private student loans can be harder to discharge than personal loans during a bankruptcy, private student lenders may offer forbearance or deferment options that let you temporarily stop making payments.
Also, you may be able to deduct up to $2,500 in interest payments on student loans, including private students loans, which isn’t an option with a personal loan.
A home equity loan
If you’ve built equity in your home, you may be able to take out a home equity loan and use the money to help pay for college.
In turn, you may be able to save money if you use a home equity loan as interest rates could be similar, or maybe even lower, than on a parent loan. The home equity loan won’t be eligible for federal student loan repayment plans, but sometimes you can make interest-only payments on the loan. Although, as with student loans, making smaller payments now will increase your overall cost of repaying the loan.
There are also a few downsides to taking out a home equity loan. Since the passing of Tax Cuts and Jobs Act of 2017 (the new tax bill), if you use a home equity loan to pay for educational expenses, the interest payments aren’t tax-deductible. But one of the biggest drawbacks is that you could be taking on a lot more risk.
With a student loan or unsecured personal loan, if you don’t make payments you could wind up getting charged fees, hurt your credit and lead to your wages or Social Security payments being garnished. Falling behind on a home equity loan can also result in fees, damage to your credit and garnished wages, and the lender may foreclose on your home.
This post was updated July 17, 2018 to reflect changes to federal student loan interest rates and fees.