Parent PLUS Loans Vs. Private Student Loans

If you’re looking to help pay for your child’s college education, it’s usually best to save up and explore financial aid options like scholarships and grants first. However, if there’s anything left to cover, you may choose between two types of parent loans for college: federal Direct PLUS Loans and private student loans.

While federal Direct PLUS Loans (also known as parent PLUS loans) come with fixed interest rates and federal protections, private student loans can have variable rates and fewer fees. The right choice for you depends on your priorities and your family’s financial situation.

Parent PLUS vs. private student loan rates

What is a parent PLUS loan?

Parent PLUS loans are government loans parents can take out to pay for all or some of their child’s college education. About 3.5 million parents have this type of loan at last count, according to the most recent data from the U.S. Department of Education.

You can borrow up to your child’s cost to attend school, minus any other financial aid they receive. With that being said, it’s important to note that loan costs are a bit higher than those of federal loans designed for students. Not only do parents pay an upfront loan fee of 4.228 percent, which is deducted from the loan disbursement, but they are also charged an interest rate of 9.08 percent for the 2024-25 academic year.

How do federal parent PLUS loans work?

Parent PLUS loans are taken out by parents to help pay the financial costs of college that aren’t covered by their students’ scholarships, grants and student loans.

While each lender sets the interest rate for its private loans, Congress sets the interest rate for parent PLUS loans each year. Federal loans have a fixed rate only — unlike private loans, which typically come with fixed or variable rates. Interest begins accruing on federal parent PLUS loans as soon as the loan is disbursed, although you can defer payments while your child attends school. Parent PLUS loans are eligible for forgiveness programs and income-driven repayment plans, which can make monthly payments more affordable.

To apply for a parent PLUS loan, follow these steps:

1. Check your eligibility. To qualify, you’ll generally need to be the biological or adoptive parent of a dependent undergraduate student who is enrolled at least half time in an eligible school. Stepparents qualify in some cases, but grandparents and legal guardians do not. You’ll also need to meet eligibility requirements for federal student aid and have a strong credit history.
2. Fill out the FAFSA. Before you apply for the loan, your child should first fill out and submit the Free Application for Federal Student Aid (FAFSA).
3. Apply for the loan. Head to the Direct PLUS Loan Application for Parents to apply. If you qualify, the loan will be included in your child’s financial aid package.
4. Receive the funds. The Department of Education will send the funds directly to your child’s school, which applies the money toward tuition, fees, room, board and other school charges. Any funds left over will go to you (or the student, if you allow).
5. Consider your repayment options. Parent PLUS borrowers are eligible for four types of repayment plans: a standard repayment plan, a graduated repayment plan, an extended repayment plan and an income-contingent repayment plan (if parent PLUS loans are consolidated into a Direct Consolidation Loan).

Parents will need to reapply for the parent PLUS loan each academic year.

How do private parent student loans work?

Private student loans originate from private financial institutions such as banks, credit unions and online lenders. Parents may take out the loan as the primary borrower or co-sign a loan with their child.

Whether you apply for a private student loan as the sole borrower or co-signer, your credit is what matters most in terms of eligibility and interest rate. Most private student loan lenders have a minimum credit score requirement and use this information when determining the borrower’s risk and, thus, interest rate.

Most private loans have several repayment terms ranging from five to 20 years but lack the income-driven repayment plans and student loan forgiveness opportunities that federal loans offer. These loans do, however, allow you to borrow more than the federal loan limit, sometimes up to the full cost of attendance.

As a co-signer, you are responsible for paying the loan if your child can’t, and late or missed payments will affect your credit. Luckily, many private lenders offer co-signer release after a series of consecutive, on-time payments.

As with federal college loans for parents, you’ll likely need to reapply each year.

How to choose a parent student loan

The decision between federal PLUS loans and private parent loans is a personal one, but there may be some instances when one loan works better than the other.

When to use a federal PLUS loan

• You could benefit from federal loan benefits: If you want access to longer repayment periods, then parent PLUS loans could be your best option. After all, you could be eligible to repay parent PLUS loans with a graduated, extended, or income-contingent repayment plan provided you consolidate your parent PLUS loans with a Direct Consolidation Loan first. And, if you work in the public service or nonprofit sector, you could also qualify for loan forgiveness.
• You have fair credit: Since the federal student loan rate is set by Congress every year and is the same for all borrowers, regardless of credit, you don’t have to worry about your fair credit score causing lenders to charge you a higher interest rate.

When to use a private loan

• You have excellent credit: If you have a strong credit score and a long credit history, you may be able to get a much lower interest rate with a private parent loan. To find out about the interest rate you might qualify for as a private parent loan applicant or co-signer, look for online lenders that let you “get prequalified” or “check your rate” without a commitment.
• You want a variable rate: Where federal PLUS loans come with a fixed interest rate only, private student loans can have either fixed or variable rates. In some cases, a lower variable rate could be more advantageous in the short term.
• You want to avoid fees or get a discount: Parent PLUS loans charge an upfront loan fee of 4.228 percent just to get started, but private student loans often come with no origination fee. Plus, some lenders offer a rate discount if you opt for automatic payments.

Is it better for a parent or a student to take out a loan?

The answer to this question depends on the parent and student’s unique financial circumstances. Generally speaking, the student should max out their federal student loans before asking for help from their parents in the form of a Parent PLUS or private parent student loan.

Once the student has exhausted their federal student loans, they should discuss their next set of options with their parent(s) to determine the best solution. Parents should weigh the pros and cons of taking out a Parent PLUS loan, applying for a private student loan in their name only or cosigning a private loan with their student.

It’s important to understand that in all three options, the parent bears responsibility for repayment. If they take out a Parent PLUS loan or private student loan for their child, they will have sole responsibility for repaying the loan. If they co-sign a private loan with their student, both parties will share responsibility for the loan. However, in any of these cases, late or missed payments by you or your student will negatively impact your credit.

Bottom line

If you’re a parent who wants to provide financial help for college, either a parent PLUS loan or a private loan could work for your needs. Your best bet is comparing both options based on how much they would cost you over the long term.

Our advice is to check out student loan rates and fees from private lenders and compare them to the fixed, expected costs of parent PLUS loans. If you can save money and secure a comparable monthly payment and repayment timeline with private student loans, doing so could lead to considerable savings.