Parent loans can be an effective way to help a student pay for college. These loans are available to parents or guardians of dependent students, and can be used to pay for college tuition, books, supplies and room and board for a certain academic year. Parents can borrow a federal plus loan or explore private loan options.
However, there are some risks to consider before you borrow. As a parent borrower, you are solely responsible for paying back the entire loan with interest. Unlike a federal student loan, there is no limit to the amount of federal direct parent loans or private parent loans you can borrow. Parents who overborrow may have trouble making payments and could risk hurting their credit or even defaulting.
A parent plus loan or a private loan can also raise your debt-to-income ratio, making it difficult to get a mortgage or other loan.
To keep your student loans to a minimum, you and your student should exhaust all other options for paying for college. This includes applying for scholarships, filing out the student’s FAFSA to qualify for grants and work-study, and pursuing out-of-the-box ideas, such as employer-paid tuition assistance programs.
If your student qualifies for a federal loan, they should borrow the maximum amount they are eligible for before you take out a private or federal parent loan. You will pay a lower interest rate on a federal student loan, and a significantly lower origination fee. If your child borrows a federal direct subsidized loan, the Department of Education pays the interest while they are in school. If they borrow an unsubsidized loan, they are responsible for paying all of the interest.
Types of Education Loans for Parents
Similar to student loans, you can get a parent loan through the federal government and through private lenders. But, these types of loans operate differently, with varying interest rates, loan terms and application processes.
Students are generally advised to take out federal student loans, such as a Stafford loan, before private student loans. That’s because federal student loans tend to offer the lowest interest rates and may be subsidized.
But, a federal direct parent PLUS loan has a much higher interest rate than a federal direct loan for a student. There is also a higher loan fee on a federal parent loan. So, in some cases, parents may qualify for a better interest rate with a private loan.
For this reason, it’s worth exploring private parent loan options alongside federal options, especially if you have good credit.
Federal Parent Loans
A Federal Parent PLUS loan is a type of direct PLUS loan that is available to parents of dependent undergraduate college students. This includes the student’s biological or adoptive parent, and, in some cases, the student’s stepparent. These loans have a fixed interest rate, meaning it will remain the same for the life of the loan, regardless of market conditions.
Parents can borrow up to the entire cost of attendance minus other financial aid. Payment is due when the loan is disbursed, but there is an option to defer payments while your child is enrolled at least half-time in school and for six months afterward.
Federal Parent PLUS loans require a credit check to ensure a borrower doesn’t have an adverse credit history , such as a bankruptcy or foreclosure. However, the credit requirements are much less strict than the requirements to get a private loan. If you have bad credit, a federal parent PLUS loan may be a better option.
A federal parent loan is eligible for a standard repayment plan, a graduated repayment plan or an extended repayment plan. You may also qualify for an income-contingent repayment plan if you consolidate the loan into a Direct Consolidation Loan.
Parent PLUS loans may be eligible for forgiveness through the Public Service Loan Forgiveness program or through an income-contingent repayment plan. Your loan may also qualify for federal student loan discharge options.
You can complete an application for a federal parent PLUS loan on the Federal Student Aid website. You must complete a Master Promissory Note for a Direct PLUS Loan before you can receive the loan funds. According to the website, the application process takes about 20 minutes.
Private parent loans
Banks, credit unions, state loan agencies and other lenders offer private parent loans. Each private parent loan offers different interest rates and different loan terms. Most private lenders offer both fixed and variable interest rate options. A fixed interest rate remains the same over the life of the student loan, while a variable rate may change depending on market conditions. Private parent loans do not typically have an origination fee.
Borrowing limits are the same as federal parent loans – you can take out as much as you need to cover the cost of attendance. Your repayment options will depend on the lender. In some cases, you may be able to defer payments until your student graduates.
If you have good credit, you may be able to get a lower interest rate with a private student loan. Unlike federal student loan rates, which are set by the government, private lenders base interest rates on other factors, including the borrower’s creditworthiness. However, you can get denied if you don’t meet the lender’s credit requirements.
One potential drawback to private loans, however, is that they are not eligible for federal student loan forgiveness and discharge programs. If you end up having trouble making payments, you can contact your loan servicer to see what options are available. You may be able to lower your monthly payment by refinancing, but use caution since this may extend your loan term.
If you decide on a private parent loan, be sure to shop around for the best interest rates and offers. (See our top picks here).
Cosigning a Student Loan
An alternative to borrowing a parent loan is to cosign a private loan with your student. When you cosign a student loan, both parties are equally responsible for repaying the debt. The loan activity is reflected on your credit report, as well as your student’s. The cosigner agreement typically lasts throughout the life of the loan, unless the borrower requests a cosigner release. Keep in mind, however, that not all lenders offer cosigner release.
When comparing different loan options, try our Loan Comparison Calculator to see which loan offers the lowest monthly payment and lowest total cost.