Finances

Federal Direct Parent PLUS or Private?

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If you’ve exhausted scholarships, grants, and Federal Direct Loans to cover college costs and are still left with funding gaps, you might be considering Federal Direct PLUS (commonly called simply “PLUS loans”) or private student loans. 

But which is the right option for you and your family? Keep reading to find out some key differences between the two loan types that are important to understand.

What to Know About Parent PLUS Loans

One type of Federal Direct PLUS loan is the Parent PLUS loan, available to parents of dependent undergraduate students.  These loans can be used to cover the cost of education, including tuition, room and board, and other related expenses.  Parent PLUS loans have a fixed interest rate, set by the federal government each year, and also come with an origination fee.

As of June 2024, the interest rate is 8.05%, and you’ll also incur loan fees of 4.228% which will be deducted from your PLUS loan disbursements unless you choose to roll it into your outstanding loan balance.

Since PLUS loans’ interest fees are not subsidized, you’ll start accruing interest on them as soon as the money is disbursed. While you can defer loan payments until six months after your child graduates, you’ll still accrue interest during that time. 

Now, let’s compare PLUS and private loans.

Who is the borrower? (Whose name is on the loan?)

• PLUS loans are issued to the parent of an undergraduate student (or to a graduate/professional student).
• Private student loans are issued in the student’s name but may require a co-borrower such as a parent to qualify or receive a lower interest rate.

What are the repayment terms?

Once your loan enters repayment (usually once you have graduated or otherwise separated from school), you have a certain amount of time to repay the loan in monthly installments.

• Federal PLUS loans are eligible for the following repayment plans:
  • Standard Repayment Plan (10 years)
  • Graduated Repayment Plan (10 years)
  • Extended Repayment Plan (25 years but must meet certain criteria)
• Private loan terms vary by lender but often have options for longer repayment terms. For example, a Student Choice line of credit has a repayment term of 20 or 25 years based on the loan balance.

Which Student Loan Option is Best for Me?

Deciding whether a Parent PLUS loan or private student loan is better depends on your circumstances and financial situation. Both options have their advantages and drawbacks, and it’s important to compare the terms and conditions of each loan before deciding.

Advantages Of Using a PLUS Student Loan

There can be many advantages to using a PLUS student loan, including:

• Access to federal benefits and protections. PLUS loans are federal loans and offer certain benefits and protections, such as income-driven repayment plans, loan forgiveness programs, and deferment or forbearance options. These benefits can provide a safety net for borrowers facing financial difficulties or having trouble repaying their loans.
• Fixed interest rates. PLUS loans have fixed interest rates, which means that the interest rate on the loan will not change over time. This can provide stability and predictability when it comes to budgeting for loan payments.
• No co-borrower requirement. PLUS loans do not require a co-borrower, which means borrowers can apply for the loan without needing another individual to co-sign the loan.

Advantages Of Using a Private Student Loan

Some of the advantages of using a private student loan to finance your education include:

• More flexible repayment options. Private student loans may offer more flexible repayment options than federal student loans, allowing you to choose a repayment term that works best for your budget and financial goals. Some lenders may also offer repayment options such as interest-only payments or deferment options.
• In many cases, lower interest rates. Depending on your creditworthiness and other factors, you may be able to secure a lower interest rate on a private student loan than with a federal student loan in today’s rate environment. This could potentially save you money over the life of the loan.
• No origination fees. Some private student loan lenders do not charge origination fees, which can save you money compared to federal student loans that charge loan fees.

Ultimately, the best loan for you will depend on your individual circumstances and financial goals. It’s important to carefully research and compare your options before deciding. Borrowers should consider their own financial situation and ability to repay the loan, as well as any potential benefits or drawbacks of borrowing from a particular lender.

For a side-by-side comparison of these loan types, check out our helpful chart or contact our College Counselor, who provides free, one-on-one advice about planning and paying for college. You can also consult studentaid.gov to learn more about federal student loans.

www.studentchoice.org