Comparing Loans? Here Are the Pros and Cons of Parent PLUS and Private Loans (2024)

• ByDebbie Schwartz

Published June 22, 2020

Once students have maximized all their available financial aid, including grants, scholarships, work-study, and Stafford loans, they may discover they still need a loan to fill a funding “gap.”

When this is the case, there are typically two options to consider: a Federal Direct PLUS loan for parents from the Department of Education, or a private student loan funded by a bank or non-profit credit union.

So, which is better, a private loan or a Parent PLUS loan?

Let’s take a look at each:

Direct Parent PLUS Loan

Pros:

• If a borrower is denied, they may qualify for an increase in other federal loan assistance.
• For loans dispersed from July 1, 2021 to June 30, 2022 the interest rate on Parent Plus loans is fixed at 6.28%. This is higher than other federal aid, but lower than the average private loan, which can go up to over 11%.
• There are more options for pausing your payments due to financial hardship when compared to private loans.
• You candefer Parent PLUS loans while your child is in school at least half-time and six months after.Interestwillaccrue on theloansduring adeferment.

Cons:

• The loan origination fee is 4.228%, which can be considered high next to some private loans, which usually have no fees.
• If you are the parent of the student, you should know that you are responsible for paying back this loan, not your student.
• Unlike other federal loans, there is no income-based repayment plan (IBR) for the Parent PLUS loan.

Private Student Loans

Pros:

• The student is held responsible for repayment, along with a cosigner, who should step in only when the student can’t pay.
• Interest rates can be fixed or variable, with variable options sometimes running cheaper than the federal fixed options, depending on the credit score of the borrower/cosigner.
• Borrowers can compare the loans of several different lenders to find rates and benefits that suit them.
• Most lenders offer full deferment and interest-only options for students while they are in school.

Cons:

• The criteria to qualify for a private loan can be strict, with interest rates and fees based on the borrower’s credit.
• Interest rates are, on average, higher than those for other types of loans.

Ultimately, it is up to the borrower to decide which option is best, while keeping in mind that scholarships and grants should be the very first options before borrowing.

Be sure to study the pros and cons of the different loan optionsbefore making your educated decision on how to pay for college.

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