Parent PLUS loan vs. private loan: what to know

Parents whose adult children are applying to college might consider a parent PLUS loan or private loan to help fund their child’s education. Several scholarships and grants are available to students based on financial need, academic merit, and field of study. However, these funding sources may not cover all of a student's educational costs. Parents often step in to cover the rest.

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In this blog, we'll discuss the key differences between federal parent PLUS loans and private student loans. We’ll also cover how each one of these loans work, how to decide which loan to get, and alternative ways to pay for your child’s college tuition. 

Parent PLUS loan vs. private loan

Parent PLUS loans are federal loans offered by the U.S. Department of Education. These loans are taken out by parents to help their children pay for college tuition and other expenses related to their undergraduate education.

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Private student loans are education loans offered by private institutions, such as banks, credit unions, and online lenders. Parents can take out a private student loan as a primary borrower or as a co-signer with their child. 

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Although both loans can be used to fund a student’s continuing education, there are a few key differences worth noting:

Parent PLUS loans

• Type of interest: Fixed interest rates
• How interest is determined: Determined by Congress & adjusted annually
• Current interest rates: 9.08% for the 2024-25 academic year
• Origination fees: 4.23%‍
• Credit required: No adverse credit history‍
• Repayment terms: 10-25 years
• Borrowing limits: Up to the cost of attendance, minus financial aid 

Private student loans

• Type of interest: Fixed or variable interest rates
• How interest is determined: Determined by lender and borrower's credit history
• Current interest rates: 3.59%-17.99%
• Origination fees: Usually 0%, but varies by lender‍
• Credit required: Good or excellent credit score‍
• Repayment terms: 5-25 years
• Borrowing limits: Varies by lender; usually up to the cost of attendance, minus financial aid for undergraduate programs and up to the full cost of attendance for graduate programs

How does a parent PLUS loan work?

Borrowers can apply for a parent PLUS loan at the Federal Student Aid website after submitting a free application for federal student aid (FAFSA). Since parent PLUS loans are provided by the federal government, they have stricter borrower criteria than private loans. Here’s what you should know before applying. 

Eligibility

To qualify for a Parent PLUS loan, you’ll need to be the biological or adoptive parent of a dependent undergraduate student. In this case, a dependent can be your son, daughter, or stepchild who is unmarried, under 24 years old, and has no legal dependents. Grandparents and legal guardians cannot take out a parent PLUS loan on behalf of their grandchildren or foster child. 

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Your child needs to be enrolled at least half-time in an undergraduate program. An undergraduate program is defined as a course of study at a college, university, or career school that doesn’t exceed four years and leads to an undergraduate degree or certificate. You and your child must also be eligible for federal student aid. 

Funds disbursement

If you’re approved for a parent PLUS loan, the Department of Education will disburse the funds directly to your child’s institution. The funds are then applied toward tuition, room and board, and other fees. If anything remains, you’ll receive the rest. You can also redirect the funds to your dependent. 

Repayment options

Interest on a parent PLUS loan begins to accrue as soon as the loan is disbursed, but you can defer repayment until your child graduates. Parent PLUS borrowers are eligible for four types of repayment plans:

• ‍Standard repayment plan: Fixed monthly payments over the life of the loan, usually 10 years.‍
• Graduated repayment plan: Lower monthly payments at the beginning of a 10-year loan term that increase every two years. ‍
• Extended repayment plan: Fixed or graduated payments over a 25-year loan term. Available to borrowers with over $30,000 in federal loans.‍
• Income-contingent repayment plan: Payments that are adjusted every year for 25 years according to the borrower’s income, family size, and total loan amount. Outstanding balances are forgiven at the end of the 25-year loan term.

How does a private student loan work?

Private student loans are offered by individual lenders to parents and students. Eligibility is determined by each lender. Interest rates vary depending on the borrower’s credit score, credit history, debt-to-income (DTI) ratio, and other financial factors. 

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The interest rate on a private loan is usually higher than on a Parent PLUS loan, but if you have excellent credit, you might be able to get a lower interest rate on a private loan. Private lenders usually prefer credit scores of 670, or higher. If you get approved for a private loan, the funds are disbursed directly to you, not your child’s institution. 

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Private loans aren’t eligible for income-driven repayment plans or student loan forgiveness. However, they don’t come with the same limitations as Parent PLUS loans which means you might be able to borrow up to the full cost of attendance. 

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You can apply for a private student loan individually, or be a co-signer on your child’s loan. As a co-signer, you’ll be responsible for paying the loan if your child can’t. However, some private lenders offer cosigner release after a certain amount of consecutive, on-time payments. Many lenders also allow for payment deferral until after graduation.

How to decide between a parent PLUS loan vs. private loan

Both parent PLUS loans and private student loans can be used to cover a student’s tuition, books, school supplies, and personal living expenses, such as housing, food, and transportation. It can be difficult to choose between the two loan options when both appeal to you and your child’s needs. Borrowers who are on the fence should focus on repayment terms and credit reports.

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In terms of repayment, parent PLUS loans offer the most flexibility. Parent PLUS borrowers enjoy longer repayment periods, income-driven repayment plans, and loan deferment until after graduation. Loan forgiveness is available after 25 years of payments and for students who work in the nonprofit or public service sector for at least 10 years. Parent PLUS loans also have less restrictive credit criteria, making them accessible for borrowers with less-than-ideal credit. 

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Private student loans don’t have as many repayment options, but they can be deferred until after graduation if your lender agrees. Private loan borrowers enjoy higher loan limits and the ability to finance graduate-level education. Although loan forgiveness isn’t available for private loans, borrowers with a strong credit history might qualify for a lower interest rate, bringing down the cost of borrowing. Private loans also allow for parents to be co-signers, allowing the student to be the primary borrower instead of the parent. 

Alternative ways to pay for college

If neither student loan option appeals to you, there are other ways to pay for your child’s college education by leveraging your home equity.

HELOC

A home equity line of credit (HELOC) is a revolving credit that lets homeowners borrow against their home’s equity. During the draw period, borrowers can withdraw funds up to a certain limit and only make interest payments. HELOC interest rates are usually variable. During the repayment period, borrowers begin repaying the amount of credit they used and continue paying off any interest that remains. The draw period usually lasts 10 years while the repayment period can last 10-20 years. HELOC borrowers need at least 15-20% equity and a good credit score to qualify. 

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Because a HELOC is secured by your home, proceed with caution – failing to make timely payments can put your property at risk. 

Home equity loans

A home equity loan allows homeowners to borrow a lump sum of cash using their property as collateral. Similar to HELOCS, borrowers need a good credit score and 15-20% home equity to qualify. Unlike HELOCs, home equity loans provide borrowers with funds upfront at a fixed interest rate. Home equity loans have terms of 5-20 years and require borrowers to start making monthly payments immediately after funds are disbursed. 

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As with a HELOC, a home equity loan is secured by your home, and the same cautions apply. 

HEI

A Home Equity Investment (HEI) from Point offers homeowners a unique opportunity to access their home equity without taking on traditional debt. Similar to a home equity loan, borrowers receive a lump sum of cash upfront. However, instead of paying off the amount borrowed, you simply provide Point with a share of your home’s future value. 

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HEIs don’t require monthly payments. Instead, repayment happens when the home is sold or refinanced. To qualify, borrowers need to have significant equity in their home. Credit and debt-to-income requirements are more relaxed than those for traditional forms of home equity financing. An HEI is also secured by your home, so you’ll need a plan for repayment when the time comes. 

Frequently asked questions

Is it better to get a private student loan or a parent PLUS loan?

Private loans are best for borrowers who are comfortable with a variable interest rate and can secure a lower rate with very good or excellent credit. Private loans also make sense for parents who prefer to be a co-signer, have funds disbursed directly to them, and whose child is pursuing a graduate degree. 

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Parent PLUS loans are best for borrowers who prefer a fixed interest rate and have poor or fair credit. Parent PLUS loans also make sense for parents who prefer to be the primary borrower, have funds disbursed directly to their child’s school, and hope to have the loan forgiven after 10-25 years. 

How many years do you have to pay off a parent PLUS loan?

Parent PLUS loans can be repaid in 10-25 years, depending on the repayment plan selected. Standard and graduated repayment plans last 10 years, while extended and income-contingent repayment plans last 25 years.

What is the difference between a private student loan and a parent PLUS loan?

The main difference between a private student loan and a Parent PLUS loan is that private student loans are funded by individual lenders, and Parent PLUS loans are funded by the U.S Department of Education. As a result, interest rates, borrowing limits, and repayment terms are different between these two types of loan offers.

Final thoughts on financing college with a parent PLUS or private loan

If you’ve exhausted all of your funding options with financial aid, scholarships, and grants, a Parent Plus or private loan could help you cover your child’s educational needs. However, you might not want – or be able to – take on an additional monthly payment. Homeowners who need a lump sum of cash upfront but don’t want to make monthly payments should consider a HEI. 

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Fund your child’s continuing education with a Home Equity Investment from Point. There are no monthly payments, excessive credit requirements, or restrictions regarding how you can use the funds. Use an HEI to pay for your child’s undergraduate, graduate, or other educational program. Explore Point’s HEIs here. 

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