Aug 05, 2021 • Jodi Anderson

What to Consider When Considering a Parent Loan to Help Fund Education Expenses

Parents have choices when it comes to borrowing for college. Outlined below are details for you to consider when researching parent loans, as not all parent loans are created equal. When considering your parent loan choices, consider the following for your family and financial situation as to which may be the right parent loan for you.

Federal PLUS Loan – Parent Loan for Undergraduate Student

The U.S. Department of Education offers Direct PLUS Loans to eligible parents through schools participating in the Direct Loan Program. Immediate repayment is required while student is attending school, unless a forbearance request is submitted and approved.

Pros:

More flexibility for parents with adverse credit history
Deferment options available upon request
Maximum PLUS loan amount is the cost of attendance at the school your child will attend minus any other financial assistance your child receives. Cost of attendance is determined by the school.
Eligible for Federal Consolidation Program
Fixed Interest Rate

Cons:

Interest rates on PLUS Loans are often higher than Parent loans offered by state-based and private lenders
FASFA completion required
Loan fee of 4.228%. The loan fee is a percentage of the loan amount and is proportionately deducted from each loan disbursement.

Note: Student has no obligation for repayment of PLUS loans.

State-Based and Private Parent Loans

There are alternatives to Federal Parent Loans. Parent loans are also offered through state-based and private lenders. Immediate repayment is typically required while student is attending school.

Pros:

Traditionally more favorable interest rates
Both fixed and variable interest rate options are generally offered
No origination fees
Choice of repayment term lengths
Forbearance options (varies per lender)
Income based repayment may be available

Cons:

More stringent credit criteria
Maximum loan amounts (varies per lender)
Not eligible for Federal Consolidation Program

Note: Student has no obligation for repayment of state-based or private parent loans.

Cosign a State-Based and/or Private Student Loan

A third option may be to cosign on a state-based or private lender student loan. In this case, your student will have a shared obligation for the repayment of this loan. These loans typically offer choices for immediate or deferred repayment in addition to offering lower interest rates than parent programs.

Pros:

Immediate repayment student loans traditionally offer the most competitive, lowest rates
Deferred payment loans are an option, with payment beginning once the student leaves school
No origination fees
Choice of repayment term lengths
Income-Based Repayment may be available
Helps student to establish credit

Cons:

Parent is obligated for repayment if the student cannot meet repayment terms.

In conclusion:

Shop around! Model the loan programs you find in a loan repayment calculator to see which program fits your budget and financial situation for you and your student. Of course, the goal is to borrow only what is needed and at the lowest rates with the most advantageous loan benefits.

If you would like more information about borrowing for college, download our free guide today.