Congratulations on your child’s admission to college! The journey isn’t quite over yet – now, it’s time to explore the options you have for paying for the education.
Between federal student loans and private student loans, the decision can be difficult to make. Each loan type caters to different individuals, so it’s important to understand all your options.
So, in the debate of Parent PLUS loans vs. private student loans, which is the better option to finance your child’s education? In this article, we’ll cover everything that you need to know.
Jump Ahead > Parent PLUS Loans • Private Loans • Side-by-Side Comparison • Which is Better?
Parent PLUS Loans
What is a Parent Plus Loan?
A Parent PLUS loan is a type of federal Direct PLUS loan that allows eligible parents to borrow money to finance their child’s college education.
Who is Eligible for a Parent PLUS Loan?
To be eligible for a Parent PLUS loan, you must meet the following requirements:
- Be the biological or adopted parent (in some cases, stepparents are allowed) of a student who is enrolled in an accredited school at least half-time.
- Be a U.S. citizen or an eligible non-citizen.
- Meet the general eligibility requirements for federal student aid.
- Have a decent credit history. (Unlike most federal student loans, Parent PLUS loans do require a credit check.)
How Much Can You Borrow in Parent PLUS Loans?
You can borrow up to the cost of attendance minus any financial aid that your student receives, such as scholarships, grants, etc. For example, if your child’s cost of attendance is $50,000 and they receive $30,000 in financial aid, you can borrow up to $20,000 ($50,000-$30,000).
Note: You do not need to accept the full amount of money that you are offered through the Parent PLUS loan; you can borrow only as much as you need. For example, in the instance described above, if you were offered the entire $20,000 but plan to contribute $5,000 out of pocket, you can choose to only accept $15,000 of the Parent PLUS loan.
What Credit Score Do You Need for a Parent PLUS Loan?
While there isn’t a minimum credit score requirement for a Parent PLUS loan, you cannot have an adverse credit history.
You will undergo a credit inquiry to assure that your credit score does not have the following reports within the past two years:
- A collection or charge-off
- One or more debts that are 90+ days overdue and total more than $2,085
You must not have any of the following on your credit report within the past five years:
- A loan default
- A discharge of debts via bankruptcy
- A foreclosure
- A repossession
- A tax lien
- Any wage garnishment
- A write-off of federal student aid debt
If your credit score is not strong enough to qualify for a Parent PLUS loan, consider adding an endorser to the loan. An endorser is similar to a cosigner – an individual who agrees to take responsibility for the loan if you, the borrower, miss any payments or default on the loan.
If your endorser has a strong credit history/score, your chances of being approved for the Parent PLUS loan can be higher.
What is the Interest Rate on Parent PLUS Loans?
For Parent PLUS loans that are disbursed on or after July 1st, 2022 and before July 1st, 2023, the fixed interest rate is 7.54%.
Can Parent PLUS Loans Be Forgiven?
Parent PLUS loans can be forgiven if specific requirements are met. However, because student loan forgiveness policies are constantly being updated by the Biden administration, be sure to keep an eye out for any changes.
Here are three federal loan forgiveness plans that Parent PLUS loans may qualify for:
Income-Contingent Repayment Forgiveness
The Income-Contingent Repayment plan allows you to make monthly payments that are calculated based on your income. After a 25-year repayment term, or repaying the debt for 25 years, any remaining debt is forgiven.
Public Service Loan Forgiveness
The Public Service Loan Forgiveness (PSLF) program is for Direct loan borrowers who:
- Have made 120 qualifying monthly payments;
- Made those payments on a qualifying repayment plan;
- Did so while working full-time for a qualifying employer.
Public service workers include teachers, firefighters, policemen, first-responders, doctors, and nurses.
| Qualifying Employer Examples | Non-Qualifying Employer Examples |
| Federal, state, local, or tribal government organizationsU.S. military Non-profit organizations AmeriCorps or Peace Corps volunteers | Labor unionsPartisan political organizationsFor-profit organizations |
Note: Even though Parent PLUS loans are used towards your student’s education, you (the borrower), and not the student, must work in public service to qualify for PSLF.
Federal Agency Employment Forgiveness Programs
If you are an employee of a federal agency, you may be eligible for Federal Agency Employment Forgiveness programs. You must be considered as a “highly-qualified” worker, and the federal agency that you are employed at determines whether or not you are eligible for this assistance.
Loan forgiveness is also contingent on a service agreement that contracts you to work three more years at the federal agency that you are employed at.
This can be extremely optimal for borrowers who are employed at federal agencies – you will be able to take out federal student loans for your child and have them forgiven if you meet the qualifications. Speak with your employer to see what federal forgiveness options you qualify for.
Note: Schedule C employees and members of Congress do not qualify for this program.
Private Student Loans
What is a Private Student Loan?
Private student loans are offered by private organizations, such as banks, online lenders, and credit unions. Because these organizations are autonomous, they set their own repayment terms, interest rates, and other lending logistics.
Who is Eligible for a Private Student Loan?
The general baseline requirements to acquire a private student loan are the following:
- You must be a U.S. citizen or a qualifying non-citizen.
- Your student must be enrolled in an eligible educational program.
However, with most private student loans, your eligibility to borrow is strongly contingent on your credit score and credit history. Private lenders are like investors: they want to make sure that you are a safe investment that will have returns (meaning that they will get their money back + any interest that accrues).
For this reason, a low credit score can harm your chances of qualifying for a competitive private student loan, or a private student loan at all. In this case, you may be able to strengthen your reliability as a borrower with a cosigner or by waiting until your credit score is stronger.
How Much Can You Borrow in Private Student Loans?
Unlike federal student loans, private student loans have limits on how much you can borrow. Loan amounts can range from $10,000 to upwards of $500,000. You will be required to submit documentation of your student’s cost of attendance, as you can’t borrow more than the amount it costs to attend.
What Credit Score Do You Need for a Private Student Loan?
You must have good to excellent credit to qualify for a competitive private student loan. Generally, the minimum credit score requirement is a FICO score of 670. However, there are lenders that work with borrowers who have low credit scores.
You must also have a clean track record of repaying your debt. This means having no late loan payments, loan defaults, foreclosures, discharge of debts, etc.
Keep in mind that when applying for loans, private lenders will conduct a hard credit check to verify your credit score and history. Hard inquiries will cause your credit score to decrease temporarily.
Note: Loan applications submitted within 30 days of each other are recognized by FICO as “rate shopping” and will be counted as one hard inquiry instead of several. So, if you plan to submit more than one loan application, make sure to do so within a 30-day period.
What to Do If You Have Bad Credit
If you do not have a strong credit score, and thus are unable to qualify, here are some options to consider:
- Consider adding a cosigner to the loan to strengthen your eligibility as a borrower. A cosigner is an individual who agrees to be added to the loan, taking responsibility for it if you are unable to. Cosigners are contractually obligated to make up any missed payments, or the entire loan, if you fail to pay it.
- Wait and apply to the private loan when your credit score is stronger. If you lower your debt-to-income ratio, you may be able to raise your credit score. You can lower your debt-to-income ratio by picking up a side hustle, making larger payments on other outstanding debt, or decreasing your expenses.
- Look into outcome-based student loans. Outcome-based student loans do not verify your eligibility based on credit, but instead vouch for your future potential to pay back the loan.
Note: There are a variety of private lenders who work with parents with low credit scores.
If you want to check which private student loans you are eligible for without a hard inquiry and no minimum credit score, consider using Sparrow. Sparrow offers a free, two-minute application that allows you to compare loans across 15+ private lenders.
What is the Interest Rate on Private Student Loans?
The interest rate on private student loans are contingent on a variety of factors including the lender, your credit score, and your credit history. Interest rates for private student loans are generally higher than those for federal student loans.
The average interest rates for private student loans were between 2.95% – 13.95% for fixed interest rates, while interest rates varied between 1.13% – 12.99% for variable interest rates.
Can Private Student Loans Be Forgiven?
No, private student loans cannot be forgiven because they are issued by independent lenders. Only federal student loans are eligible for loan forgiveness.
Parent PLUS Loans vs. Private Loans: How Are They Different?
Now that we’ve discussed the nuances of Parent PLUS loans and private loans individually, let’s compare them side by side.
| Attributes | Parent PLUS Loans | Private Loans |
| Interest Rate | 7.54% | Differs by lender. Generally between 2.95% – 13.95% for fixed interest rates and 1.13% – 12.99% for variable interest rates. |
| Repayment Plans | Three options: • Standard Repayment Plan • Graduated Repayment Plan • Extended Repayment Plan | Differs by lender. |
| Loan Forgiveness | Yes, certain federal loans qualify for loan forgiveness. | No, private loans do not qualify for loan forgiveness. |
| Cosigner Options | Parent PLUS loans have the option to add an endorser to the loan. | Yes, most private loans allow cosigners to be added to the loan. |
| Credit Checks | Yes. | Yes. |
| Credit Score Requirements | You must not have an adverse credit score/history and must be in decent standing. | You must have a strong credit score to be eligible for competitive private loans. |
Parent PLUS Loans vs. Private Loans: Which is Better?
Between Parent PLUS loans and private loans, one option is not necessarily “better” than the other. In terms of the better option for you, you’ll have to evaluate yourself as the borrower.
If you plan to pursue any loan forgiveness programs, you may prefer a Parent PLUS loan over a private parent loan. If you are more concerned with finding a competitive interest rate, you may find that a private student loan suits you better.
| Questions to Ask Yourself for Parent PLUS Loans | Questions to Ask Yourself for Private Student Loans |
| Do you plan to pursue any student loan forgiveness programs (Public Service Loan Forgiveness, etc.)? | Are you confident in your ability to repay the maximum loan repayment amount? |
| Are flexible repayment terms a priority for you as a borrower? | Do you have a strong credit score? If not, do you know someone who has a strong credit score and is willing to be your cosigner? |
| Do you prefer fixed interest rates as opposed to variable interest rates? | Can you qualify for a competitive interest rate with your credit score? |
If you answer more yeses to one column over the other, that option may be the most feasible one for you. Again, be sure to evaluate your priorities and circumstances as a borrower to determine which is better for you.
Closing Thoughts From the Nest
Before applying for a student loan, be sure to thoroughly do your research on each loan so that you are choosing the most optimal option for your circumstances. Both Parent PLUS loans and private loans have their individual benefits and drawbacks, so assessing your needs as a borrower is crucial.
If you opt for a private student loan, Sparrow is here to help. Submit a quick, free application with us today to compare your options across 15+ private lenders.