Parents who pay for their children’s higher education have a wide range of financing options available, both from government and private sources. Given that the cost of a college education has been steadily rising, it’s important parents choose financing options that offer them the best terms and prices.
The U.S. Department of Education provides federal Parent PLUS Loans, which come with higher interest rates than other federal loans and substantial origination fees. On the other hand, private loans may offer reduced fees and potentially lower interest rates — but less flexible repayment options.
How can you know which college financing option is right for you? Here is what you need to know about Parent PLUS Loans and their alternatives.
What are Parent PLUS Loans?
Parent PLUS Loans are government loans provided by the Office of Federal Student Aid to parents borrowing on behalf of their children. Parents can borrow up to the total cost of attendance at their child’s school minus any financial aid received. The interest rate for Parent PLUS Loans is currently 8.05%. It’s worth noting that this interest rate is fixed for the duration of the loan. To qualify, borrowers must have a child enrolled at least part-time at a college or university that falls under Title IV.
Pros of Parent PLUS Loans
While parent loans for college are one way of securing funding for your child’s education, it's important to consider the pros and cons of taking one out.
You can borrow as much as you’d like
Compared to other federal student loans, Parent PLUS Loans offer flexible borrowing capacity. The borrowing limit extends up to the total cost of attendance after accounting for any other financial aid received. This loan feature proves beneficial when your child's financial aid package is minimal or if you’re unable to meet your Expected Family Contribution.
Your interest rate will stay fixed over the life of the loan
Similar to other federal student loans, the interest rate for the Parent PLUS Loan remains fixed, which means it stays consistent throughout the designated loan term. Regardless of the fluctuation of national interest rates, your loan will be secured at the initial rate you received.
You have various options for repayment
In addition to flexible loan limits, borrowers also have flexible parent PLUS loan repayment terms. This can protect you if you ever encounter job loss or financial difficulties. A private lender will rarely offer flexible repayment terms. As a borrower, you qualify for all the following repayment plans:
- Standard Repayment Plan: Borrowers pay off loans at a fixed monthly rate for 10 years.
- Graduated Repayment Plan: Borrowers begin paying a small monthly payment that gradually increases over the course of 10 years.
- Extended Repayment Plan: Borrowers pay either fixed or graduated payments monthly for 25 years.
- Income-Contingent Repayment Plan: Borrowers pay 20% of their discretionary income on a monthly basis and can qualify for student loan forgiveness after a period of 25 years.
Cons of Parent PLUS Loans
You have to pass a credit check
Having an excellent credit report isn’t necessarily mandatory, but an adverse credit history will negatively impact eligibility.
According to the Department of Education, a borrower has adverse credit if there is a default, foreclosure, repossession, tax lien, wage garnishment, write-off, or discharge of debt on their credit history within the last five years. However, a creditworthy endorser can help borrowers qualify for a Parent PLUS Loan if they are included in the application.
Parent PLUS Loans come with origination fees
In addition to paying interest, you’ll also have to pay a loan origination fee. Loans disbursed on or after October 1st, 2022, and through September 30th, 2023, come with an origination fee of 4.228%. If you were to borrow $50,000, you would need to pay an origination fee of $2,114. This additional fee is something to consider, given that private student loans typically do not impose an origination fee.
You’re expected to start repayment right away
When your child takes out a student loan independently, they are usually granted a grace period before initiating repayment. The grace period often lasts until they complete their studies or even six months after graduation. However, the repayment timeline for a Parent PLUS Loan is different — monthly payments begin immediately after the loan has been disbursed. In some cases, requesting a student loan deferment while your child is enrolled at their college or university may be possible. Although your payments towards the loan principle may be paused, interest payments will not be.
Parent PLUS Loan alternatives
Consider applying for merit-based scholarships on behalf of your child. One large scholarship or a combination of smaller ones may substitute the need for a Parent PLUS Loan. Scholarships are gift aids that don’t need to be repaid. Educational institutions, corporations, non-profit entities, and other organizations provide them. FastWeb.com displays a wide range of scholarships available to college students and their eligibility requirements.
Federal and state grants
Another form of gift aid is a federal or state grant. Like scholarships, they don’t require repayment. However, they are typically awarded based on financial need and serve a larger purpose than simply providing school aid. Grants are usually dedicated to a specific group, such as women in tech or immigrants in the medical field, and are offered by federal and state governments, non-profit organizations, and educational institutions. You can start your search for grants here.
Federal student loans for students
Federal student loans are often considered competitive because they offer lower interest rates and fees. Unlike Parent PLUS Loans, these loans are taken out in the child's name. As a parent, you’re not obligated to repay them.
Depending on your child’s financial need and student status, they may be eligible for Direct Subsidized or Direct Unsubsidized Loans. Subsidized loans are subsidized by the government. Your child won't be responsible for the interest accumulated on their loan during their time in college, deferment periods, and six months after graduation. Students often prefer loans offered by the federal government because they could be subsidized.
Education Savings Plans & 529 Savings Plans
You could also start planning for your child’s education ahead of time and create a Coverdell Education Savings Account (ESA) or a 529 Savings Plan. Both ESAs and 529s are tax-deferred investment accounts that work similarly to a Roth IRA. The main difference lies in income levels. Both are considered advantageous when compared to Parent PLUS Loans because of the following:
- Tax exemptions: Financial contributions and qualified withdrawals to 529 plans and ESAs are exempt from taxes.
- Flexibility: While Parent PLUS Loans are explicitly designated for educational expenses at eligible institutions, 529 plans and ESAs can cover a broader range of educational costs such as books, supplies, and room and board.
- Debt-free: By opting for 529 plans or Coverdell ESAs, families can avoid accumulating additional debt through Parent PLUS Loans, private loans, or other types of student loans.
It’s important to keep in mind, however, that your investments in these savings accounts are not guaranteed to grow. Like any type of investment, you run the risk of losing money.
Leverage home equity to pay for a child’s education
Parents who are also homeowners can leverage their home equity to cover the costs of college. Home equity financing can be a more stable funding source since the loan or line of credit is backed by collateral. As a result, interest rates are usually lower. Additionally, equity financing prevents parents from taking on additional debt if they're already paying off a mortgage.
Home equity loan
A home equity loan allows you to borrow funds against your property at a lower interest rate than most other loans. Often referred to as a second mortgage, this loan provides you with a lump sum of money that you can use to cover a major expense, such as your child’s college education. A home equity loan is repaid similarly to a mortgage by making regular payments over an extended period.
Home equity line of credit (HELOC)
A HELOC works similarly to a credit card, allowing you to borrow funds up to a predetermined credit limit and withdraw when needed. Interest is accrued exclusively on the amount of money that is borrowed. A HELOC allows you to access cash over a 5 to 10-year draw period. Once over, it transitions into the repayment period.
Home Equity Investment (HEI)
A Home Equity Investment gives homeowners a lump sum of cash in exchange for a share of their home's future appreciation. The investment can be paid back anytime during a 30-year period. There are no monthly payments or restrictions on how to use the funds. The requirements are generally less strict than other home equity products, which benefits homeowners with less-than-perfect credit or low income.
Making an informed decision
Funding your child’s college education is a major financial responsibility. Before deciding which funding method or combination of funding methods is the best for you and your child, make sure to consider all of the following:
- Financial needs: Begin by estimating the total cost of your child's education, including tuition, fees, books, and living expenses. Weigh available scholarships, grants, and other financial aid options to determine which funding options make the most sense.
- Current financial standing: Equally as important is your financial standing. If you need a large amount but aren’t in the position to pay back such a large sum, consider maximizing gift aid options and options that help you avoid debt.
- Long-term impact: Whether you take out a Parent PLUS Loan, private loan, federal student loan, or some other combination of the funding methods mentioned above, you’ll want to consider the long-term implications of your financing options. Keep in mind your retirement goals and other financial commitments.
Provide your child or children with a college education is priceless. Not only will they be better prepared for the workforce, but they’ll also be exposed to unique life experiences they can’t get anywhere else. However, with the cost of a college education higher every year, it’s understandable that parents and students are worried about being able to pay for college. Visit Point to find out if you qualify for an HEI and start financing your child’s future today.