Parent PLUS Loan vs. Private Loans: Which Option Offers Better Rates?
If you’re helping your child pay for college, you have two main options for loans: Parent PLUS loans and private student loans. Parent PLUS loans could be a better option if you want access to federal repayment plans, but private loans might cost less if you have good credit. Read on for a full comparison of Parent PLUS loan versus private loans so you can decide which option, if either, is right for you and your family.
Parent PLUS loan vs. private loan rates
Let’s start with an overview of private loan and Parent PLUS loan interest rates and terms.
| Parent PLUS loans | Private student loans | |
|---|---|---|
| Credit requirements | No adverse credit history | Good credit (a FICO Score in the mid-600s or higher) or a cosigner with good credit |
| Interest rate (2019-2020) | 7.08% | As low as 3.00% depending on the lender and the borrower's credit score |
| Loan fee (2019-2020) | 4.236% | Varies by lender |
| Annual loan limit | Up to the cost of attendance after other financial aid is applied | Up to the cost of attendance, but some lenders have their own loan limits |
| Option to cosign with student | No | Yes |
| Option to borrow in parent's name only | Yes | Yes |
| Can be used for advanced degrees | No | Yes |
As you do your research, some parents could get a lower private loan rate than a Parent PLUS loan interest rate. Specifically, parents with a good credit score and healthy credit history could pay less with private loans.
That’s especially true when you take the Parent PLUS loan fee into account, since some private lenders don’t charge any student loan fees or origination fees at all.
A cost comparison of Parent PLUS loans vs. private loans
But let’s compare apples to apples by looking at Parent PLUS loans versus a similar private student loan. For example, consider a $10,000, 10-year Citizens Bank student loan for parents with a fixed rate of 5.48% APR.
Assuming you choose to enter full repayment immediately, here’s how your costs would break down:
| Loan fee | Interest rate | Interest costs on $10,000 | Total loan costs | |
|---|---|---|---|---|
| Parent PLUS loan | $424 | 7.08% (2019-2020) | $3,983 | $4,407 |
| Citizens Bank's student loan for parents | $0 | 5.48% | $3,011 | $3,011 |
With Citizens Bank, your lower rate and 0% origination fee would lead to a savings of $1,396 over 10 years. If you’re borrowing more than $10,000, snagging lower rates and fees could lead to even greater savings under this scenario.
Parent PLUS loans are a better deal for fair or poor credit
Parent PLUS loans can be a smart option for some parents despite their higher interest rates and fees. Applying for Parent PLUS loans does require a credit check, but the requirements are easier to meet than the requirements for private student loans are.
To qualify for Parent PLUS loans, you must not have an “adverse credit history.” You might have an adverse credit history if you have:
- Debt totaling more than $2,085 that is 90 or more days delinquent, is in collections or has been written off in the past two years
- Debt accounts that list a bankruptcy discharge, repossession, default, foreclosure, wage garnishment or tax lien
But even if you have those negative marks, you might be able to get a Parent PLUS loan through an appeal or by adding an endorser (similar to a cosigner) to your application.
It’s easier to get approved for Parent PLUS loans than it is to get approved for private student loans. So if you have bad credit, Parent PLUS loans might be your best bet.
When private lenders might offer you your best student loan rates
Private student loans for parents can be the more affordable way to finance college in the right circumstances.
You have great credit
To get your lowest student loan rates from private lenders, you’ll need to meet the following requirements:
- Good or excellent credit
- Solid credit report and repayment history
- Debt-to-income ratio of 30% or lower
If that sounds like you, then get started on your private student loan shopping. You’re likely to get some of your best student loan rates out there.
The most accurate way to find out if you could pay less with a private student loan is to request rate estimates. Lenders often provide rate checks before you apply for a parent student loan and use a soft credit check that won’t hurt your score. You can compare these offers to Parent PLUS loans to find your best deal.
You’re choosing a loan term shorter than 10 years
Lenders often will offer lower student loan rates for shorter loan lengths. The lender will make its money back faster, which lowers its risk — a good reason to offer you a better deal. If you’re able to pay off your loans quickly, you might be able to snag a better rate with a private lender.
Parent PLUS loans, on the other hand, offer only a 7.08% interest rate (2019-2020) and a standard 10-year repayment period. At disbursement, there are no options that lead to a lower rate on these loans.
You’re opting for a variable rate
Variable rates tend to start lower than fixed ones, though they could rise over time. If you’re able to pay your private student loan off relatively quickly, choosing a variable rate could lead to savings.
With Parent PLUS loans, you don’t have the option of a variable rate, only a fixed one. So depending on your financial situation, a private student loan has the potential to offer greater interest savings than a federal one.
Overall, both Parent PLUS and private student loan rates make it affordable to borrow for your child’s education. But which option, Parent PLUS loans versus private loans, offers the better deal will depend on you and your financial situation.
In the end, shopping around and comparing student loan rates is always worth your time.