What Are the Tradeoffs of PLUS Loans and Private Student Loans?

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By Mark Kantrowitz

May 21, 2020

There are several advantages and disadvantages of Parent PLUS loans and private student loans. Depending on the parent’s circumstances, one type of loan may be better than the other.

Differences in Loan Eligibility

This table shows the differences in who is eligible for a Parent PLUS loan vs. a private student loan. Parent PLUS loans are generally more available than private student loans, since eligibility for a private student loan depends on the creditworthiness of the borrower and cosigner.

Characteristic Parent PLUS Loans Private Student Loans
Lender U.S. Department of Education Banks, credit unions, state loan agencies, other financial institutions
Borrower Parent of a dependent undergraduate student Student
Degree Level Undergraduate Undergraduate, graduate
FAFSA Required Yes No
Cosigner Required Only if borrower has an adverse credit history Required for 90% or more of private student loans for undergraduate students and two-thirds of private student loans for graduate students. The cosigner is usually the parent.
Credit Underwriting No Adverse Credit History Credit scores, debt-to-income ratios, income, duration of employment, no adverse credit history, other factors
Minimum Credit Score None Typically, 650 or 670
Loan Limits Annual: COA – Aid
Aggregate: None
Annual: COA – Aid
May also have fixed annual and aggregate limits that vary by degree level and major

If a parent is denied a Parent PLUS loan due to an adverse credit history, the student becomes eligible for the higher unsubsidized Federal Direct Stafford loan limits available to independent students.

Differences in Loan Cost

This table highlights the differences in the cost of Parent PLUS loans and private student loans.

Characteristic Parent PLUS Loans Private Student Loans
Overall Cost Less expensive More expensive, unless borrower or cosigner has excellent credit
Interest Rates Same for all borrowers Based on credit score of borrower and cosigner, if any
Interest Capitalization Once, when loan enters repayment May be as frequently as monthly
Loan Fees About 4% No Fees
AutoPay Discounts 0.25% interest rate reduction None, 0.25% or 0.50% interest rate reduction

Parent PLUS loans and most private student loans are eligible for the student loan interest deduction.

Differences in Loan Repayment

Repayment plans differ between Parent PLUS loans and private student loans. Repayment options are generally better for federal loans, but private student loans offer more in-school payment options.

Characteristic Parent PLUS Loans Private Student Loans
In-School Payments Full deferment, immediate repayment Full deferment, fixed payments ($25/loan/month), interest-only payments, and immediate repayment
Deferments In-school, grace period, economic hardship, unemployment, etc. In-school, grace period
Forbearances Maximum of 3 years Maximum of 1 year
Repayment Plans Standard (10 years), Graduated, Extended (12, 15, 20, 25, 30 years), Income-Contingent (if consolidated) 5, 7, 10, 15 or 20 years, depending on lender
Repayment Plan May Change Yes 5, 7, 10, 15 or 20 years, depending on lender
Discharges Death (student or parent), Disability (parent), Closed School, Identity Theft, Unpaid Refund, False Certification Some lenders offer death and disability discharges
Loan Forgiveness Public Service Loan Forgiveness, other loan forgiveness options None

There are no prepayment penalties on federal and private student loans.

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