Think Twice about High Parent PLUS Loan Interest Rates
May 8, 2019
Every parent wants to see their children succeed, and for some, that includes helping their kids pay for college. Parent PLUS loans are federal student loans that parents can use to do just that.
However, Parent PLUS loan interest rates, fees, and eligibility requirements aren’t quite as generous as what your child may qualify for as an undergraduate student. You also may qualify for a lower rate with a private student loan, which for many parents can be a wise alternative to consider. Before you apply, here’s what you need to know.
How does a Parent PLUS loan work?
The U.S. Department of Education offers Parent PLUS loans to biological or adoptive parents of dependent undergraduate students. In some cases, stepparents may also use these loans to help a stepchild pay for their education. Here’s a breakdown of the major features of Parent PLUS loans.
The Parent PLUS loan interest rate is 7.6% for the 2018-2019 school year but may change on July 1 for the upcoming school year. The interest rate is fixed, so you don’t have to worry about it fluctuating over time. However, it’s quite a bit higher than undergraduate federal loans, which charge a 5.05% rate.
In addition to a higher interest rate, Parent PLUS loans also come with a loan fee of 4.248% of the loan amount. This fee is deducted from your loan disbursement. In contrast, subsidized and unsubsidized undergraduate loans charge a loan fee of just 1.062%.
Most federal student loans don’t require a credit check. However, there is one with Parent PLUS loans. That doesn’t mean there’s a minimum credit score requirement. Instead, the credit check is to make sure that you don’t have any major negative items on your credit report currently or in the last five years.
Examples include 90-day delinquent debts, foreclosure, bankruptcy, tax liens, wage garnishments and more. These signs of adverse credit can make it difficult to get approved unless you can prove certain extenuating circumstances.
Parent PLUS loan limits are one positive thing when compared with undergraduate loans. That’s because parents can borrow up to the total cost of attendance for their child (minus any other financial aid your child receives).
Undergraduate loans, on the other hand, are limited based on your child’s year in school and whether they’re independent or dependent on you for financial support.
When Parent PLUS loans aren’t the best option
As long as you don’t have any major negative items on your credit report, getting a Parent PLUS loan can be relatively easy. But if you have a strong credit profile, you may be able to qualify for a lower rate than what Parent PLUS loans offer.
If this is the case, it may be worth comparing the Parent PLUS loan interest rate and loan fee to private student loans. You can check your rates with multiple lenders using Purefy’s rate comparison tool, which is free and easy to use, and doesn't affect your credit score.
Because private student loans are originated and serviced by private lenders, there is a full credit check involved if you submit an application. But if you’ve taken care of your credit, you may have a good chance of getting approved with favorable terms.
How private student loans stack up
It’s always a good idea to compare various options whenever you’re borrowing money. As you compare federal Parent PLUS loans and private student loans, here are the features to consider.
Lenders typically provide a range of interest rates and the one you qualify for will usually be based on your credit history, employment and income information, and other debts, among other factors.
So depending on your complete credit and financial profile, you may or may not qualify for a lower interest rate than what you can get with Parent PLUS loans.
That said, private student loans typically don’t charge an origination fee, which means you’ll save more than 4% on the loan fee for Parent PLUS loans. If the interest rate you qualify for with a private lender is slightly higher than what the government offers, that upfront savings could still make it worth it.
Private student loan limits can vary by lender. But in most cases, you can get enough funds to cover your child’s cost of attendance. Double check with the lender before you apply, though, to ensure you’ll get what you need.
Private student loans typically don’t come with the same level of benefits as Parent PLUS loans. For example, the federal government gives parents access to the income-contingent repayment plan, which allows you to reduce your monthly payment based on your discretionary income. This can be helpful for parents who find themselves struggling to make payments.
The U.S. Department of Education is also more generous than private lenders with deferment and forbearance options if you can’t afford to repay your loan.
Which option is right for you?
When it comes to helping your child pay for their college education, there’s no one-size-fits-all solution. Parent PLUS loans can be a better choice if you’re having a hard time qualifying for a low interest rate with private loans, or if you prefer the safety nets the federal government provides.
On the flip side, private student loans may be a better choice if you have a strong credit history and solid income and employment, and you’re not concerned about being able to make the necessary payments. Use Purefy’s rate comparison tool to see rate offers from multiple lenders, with no effect to your credit score.
Regardless of which option you choose, it’s important to make sure that you’re in a good financial position to borrow money. While it’s a loving gesture to help your child pay for college, it could leave you in debt for years to come and potentially threaten your retirement plans.
Before you consider taking out a private loan or Parent PLUS loans, make sure your retirement savings plan is on track, and you don’t have any other pressing financial obligations that could complicate things.
Also, have a plan in place to make the monthly payments, or even pay off the debt early, if possible. As you do a gut check and take the time to research all your options, you’ll be in a much better position to help your child prepare for the future without putting your own at risk.