Today’s parents are borrowing more — and more often — to fund their children’s educations. Most parents who borrowed for a child’s education reported a combined student loan balance of $40,000 or higher, according to our parent student loans survey.
For these parents, managing a federal Parent PLUS Loan or other student debt often competes with other important priorities. With so much on the line, it’s crucial to make the best borrowing decisions upfront — whether that means getting a PLUS Loan or not.
When a federal Parent PLUS Loan won’t make sense
Here are several situations in which a federal Parent PLUS Loan doesn’t make sense and suggestions for how to find better options.
1. Your child hasn’t hit their borrowing limits
Before you take out a Parent PLUS Loan, consider maxing out other student loans. Direct Subsidized Loans and Direct Unsubsidized Loans, both of which are available only to students, might be more cost-effective.
With a 4.45% interest rate and 1.066% loan fee, these loans for students have significantly lower costs than Parent PLUS Loans, which have a 7.00% interest rate and 4.264% loan fee.
Because of these lower fees, your child’s federal student loans will cost less than Parent PLUS Loans. For example, a $10,000 Direct Unsubsidized Loan would cost $1,844 less over the life of the loan than a Parent PLUS Loan of the same amount. That’s $1,525 in interest savings from the lower rate and $319 less in initial fees.
Before taking out Parent PLUS Loans, families should turn to more affordable options and borrow up to the student loan limits. These limits are between $5,500 and $7,500 a year for Direct Unsubsidized Loans and Direct Subsidized Loans for undergrads and $31,000 in aggregate.
2. You could pay less with private student loans
Direct Subsidized Loans and Direct Unsubsidized Loans aren’t the only potentially cost-effective alternatives to a federal Parent PLUS Loan. You might be better served by choosing a private student loan for parents over federal options.
Private student loan APRs are often lower than the 7.00% charged on Parent PLUS Loans. Our favorite private student loans have rates that start at less than 3.00%, for example.
Plus, many lenders don’t charge origination fees on private student loans. Even when they do, it’s often less than the 4.264% levied on Parent PLUS Loans.
There’s one catch, however: What you pay on a private student loan will depend on your credit score and other borrowing qualifications. While all Parent PLUS Loan borrowers are charged the same rate, private lenders set interest rates according to each borrower’s credit score.
Usually, only applicants with excellent credit will qualify for private student loan rates low enough to beat Parent PLUS Loans. Shop around for private student loans for parents and compare offers to see if you’d pay less with private lenders than you would with a federal Parent PLUS Loan.
3. You want your student to share responsibility for the loan
Parents often have to get involved with borrowing when students reach their federal student loan limits. If a student can’t borrow more on their own but still has college costs to pay, they often can get access to additional loans only with help from Mom and Dad.
For parents who want their child to be primarily responsible for this debt, cosigning a student loan can be the preferable choice. This option is available only on private student loans, however. There are no federal student loans a student and parent can cosign together.
Cosigning allows you to help your child qualify for a student loan — but with the assumption your child will be primarily responsible for repaying it. Keep in mind that you’re equally legally liable for this debt as a cosigner. If your child stops paying for any reason, you’ll be on the hook to pay it off.
Still, having your child as a cosigner makes this student debt legally owned and shared. This differs from Parent PLUS Loans and private parent loans, which are held in the parent’s name only and for which students can’t be held responsible.
4. You’re helping your child pay for grad school
Maybe your student is headed for graduate school, med school, law school, or another professional program. If you want to help them pay for graduate school, private student loans will be your only option to do so.
The federal Parent PLUS Loan is available only to parents of undergraduate students. If you want to borrow to help pay for your child’s advanced degree, private student loans are the way to go.
Like undergraduate students, however, graduate students might have access to federal aid and student loans that are a better deal. Talk through all the borrowing options with your graduate student to find the best and most affordable way to finance their degree.
5. You can’t afford the payments
If you’re considering a federal Parent PLUS Loan, be careful of how much you borrow. These student loans should be used carefully and conservatively, and you should borrow only what you can afford to repay.
But the limit on how much you can take out with Parent PLUS Loans has more to do with your child’s college costs than with what you can afford to repay. While private lenders usually look at your debt-to-income ratio when they evaluate your application, Parent PLUS applications include no such income requirements.
Parents can borrow whatever amount is needed to fully cover their child’s educational expenses. But the fact that you can borrow the loans doesn’t mean you can afford to repay them.
Be sure your payments will be manageable when added to the debt you already have. Use our student loan payment calculator to estimate how much you’d pay each month on your new loan.
Keep in mind that this is a debt you’ll be paying off for the next 10 years. If you can’t afford to repay it, you shouldn’t take out a federal Parent PLUS Loan.
Need a student loan?Here are our top student loan lenders of 2019!
|2 Important Disclosures for College Ave.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
(1)All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with an 8-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7% variable Annual Percentage Rate (“APR”): 96 monthly payments of $179.28 while in the repayment period, for a total amount of payments of $17,211.20. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.
Information advertised valid as of 5/22/2019. Variable interest rates may increase after consummation.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
3 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
4 Important Disclosures for Discover.
5 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
6 Important Disclosures for LendKey.
7 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.99% – 11.32%2||Undergraduate, Graduate, and Parents|
|4.50% – 11.35%*,3||Undergraduate and Graduate|
|4.84% – 13.49%4||Undergraduate and Graduate|
|4.25% – 11.30%5||Undergraduate and Graduate|
|4.50% – 9.47%6||Undergraduate and Graduate|
|3.74% – 9.72%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.32%8||Undergraduate, Graduate, and Parents|