Parent PLUS Loan vs. Private Student Loans

Parent PLUS loans and private student loans are two of the options available to prospective students and their families for funding a higher education. Parent PLUS loans refer to a type of federal student loan that parents can take out on behalf of their child, whereas private student loans are those offered by private lenders (e.g., banks, credit unions, etc.) instead of the government. Generally speaking, the federal benefits and protections of parent PLUS loans make them the better option of the two, though private loans are still worth considering if you have funding gaps.

Key Takeaways

• Parent PLUS loans and private student loans are two possible ways to pay for college education costs.
• Parent PLUS loans are offered by the federal government and come with similar protections and benefits to other federal student loans.
• Private student loans are offered by private lenders and can have more flexible repayment terms.

Parent PLUS Loans

Parent PLUS loans are federal loans available to parents of dependent, undergraduate students. This means that the parents are responsible for repaying the debt on behalf of the child for whom the loan was taken out.

Pros

• Covers up to the cost of attendance

• Fixed interest rates

• Federal benefits and protections

Cons

• Limited repayment options

• Higher interest rates

• Approval isn’t guaranteed

Pros Explained

• Covers up to the cost of attendance: If you still have funding gaps after receiving your financial aid package, a parent PLUS loan can cover the rest, up to the cost of attendance. As such, you’re less likely to need private funding (or at least won’t require as much).
• Fixed interest rates: PLUS loans are the only type of federal student loan that triggers a hard credit inquiry. But unlike with private loans, your interest rate on a parent PLUS loan isn’t dependent on your credit score (only your approval is). All borrowers get the same interest rate, based on when you take out the loan.
• Federal benefits and protections: Parent PLUS loans get many of the same benefits and protections as other federal student loans. If you need an income-driven repayment (IDR) plan, parent PLUS loans are eligible for Income-Contingent Repayment (ICR). After 25 years of on-time payments, the remaining balance is forgiven. Parent PLUS loans are also eligible for discharge if either the parent or the student passes away, can qualify for forgiveness under Public Service Loan Forgiveness (PSLF), and can benefit from federal deferment and forbearance.

Cons Explained

• Limited repayment options: ICR is the only type of IDR plan that parent PLUS loans are eligible for.
• Higher interest rates: PLUS loans have higher interest rates compared to other types of federal loans. For the 2024–25 school year, PLUS loans have an interest rate of 9.08%. Meanwhile, for direct subsidized and unsubsidized loans for undergraduates, the interest rate is 6.53%.
• Approval isn’t guaranteed: While most borrowers can get approved for a parent PLUS loan even with fair credit, some prospective borrowers won’t be. There’s also no pre-qualification option, so you can’t find out whether you’ll qualify without applying, and the resultant hard inquiry will temporarily lower your credit score.

When to Choose Parent PLUS Loans

You might want to get a parent PLUS loan if:

• You’ve exhausted all of your other federal funding options, including scholarships, grants, as well as subsidized and unsubsidized loans.
• You’re eligible (or your parent is).
• You can afford to make payments on your dependent student’s behalf after they leave school or you’ve worked out a reasonable repayment plan with them.

Private Student Loans

Private student loans are education loans offered by private institutions, such as banks, credit unions, and online lenders.

Pros

• Can apply at any time

• Potentially lower interest rate

• Shorter repayment term options

Cons

• No federal protections or benefits

• Good credit required

• More expensive

Pros Explained

• Can apply at any time: You can only apply for federal student loans while the application period is open. This means that once the window closes, you can’t get any federal loans (including parent PLUS loans) for the rest of the year. With private student loans, you can submit an application whenever you need to.
• Potentially lower interest rate: Borrowers with excellent credit might qualify for a lower interest rate with a private student loan than what they’d get with a parent PLUS loan.
• Shorter repayment term options: If you want to pay off your debt as soon as possible after you leave school, a private student loan might be the best choice. Repayment terms can start as low as five years (the shortest federal student loan repayment term is 10 years). While you monthly payments would be higher, you’ll also pay off your debt much sooner, which saves money on interest in the long run.

Cons Explained

• No federal protections or benefits: Only federal loans offer debt forgiveness through PSLF or IDR plans. While some lenders may offer hardship programs, approval isn’t guaranteed, and if you are approved, it could just be for the short term. There are typically no automatic deferment or forbearance options with private student loans.
• Good credit required: You’ll need good or excellent credit to not only qualify for a private student loan but also get the lowest interest rate possible. If you have less-than-stellar credit, you could end with a higher interest rate under a private loan than you would with a parent PLUS loan or other federal options.
• More expensive: In addition to potentially higher interest rates, those shorter repayment terms mean you could have a higher monthly payment compared to a federal loan. This may make it harder to consistently pay on time, and since private lenders don’t offer forbearance, there’s a greater risk of defaulting on your loans if you miss enough payments.

When to Choose Private Student Loans

You may want to choose private student loans if:

• You’ve exhausted all your federal student aid options.
• You have solid credit to secure a lower interest rate than what’s offered at the federal level.
• You don’t qualify for forgiveness and/or don’t mind forgoing federal benefits and protections.

Is It Better for the Student or Parent to Take Out a Student Loan?

So long as they’re aware of the risks and requirements that come with borrowing money, it’s typically better for a student to take out an federal education loan first. If you’ve exhausted all your federal aid options as a student, then it might be a good idea for your parent to take out a parent PLUS loan or co-sign a private student loan with you.

What Is the Best Student Loan Option?

The best student loan is the one that provides the exact amount of funds you need to cover education-related expenses, comes with the lowest interest rate available, and provides affordable monthly payments after you leave school.

Is the Parent PLUS Loan Federal or Private?

A parent PLUS loan is a type of federal student loan that’s taken out by the parent of a dependent, undergraduate student.

The Bottom Line

Whether a parent PLUS loan or a private student loan is the right fit for you or your child will depend on your needs and financial circumstances. Generally speaking, a parent PLUS loan is worth taking out if you’re eligible and have exhausted all other conventional means of paying for college. However, if you still need funds and have no federal student aid options left, then a private personal loan is worth considering for a student.