Parent student loans are loans that parents or legal guardians can take to help cover the cost of their child’s college tuition. This is different from student loans, which a student takes to pay for their own college tuition. The funds from both loans can be used to cover any college-related costs including tuition, fees, room, board, and school supplies. Although both loans help with the cost of college, they are fundamentally different from each other.
Unlike student loans, which are in the student’s name, a parent student loan is entirely in the parent’s or guardian’s name. The parent or guardian who applies for the loan takes full responsibility for managing and repaying the loan.
There are two types of parent student loans – Federal Parent PLUS loans and Private parent student loans. The federal government funds Parent PLUS loans. Private parent student loans are issued by private lenders and financial institutions.
The eligibility criteria, application processes, and terms and conditions vary significantly among these two types of loans. Each has its benefits and drawbacks too.
Here’s what you should know about taking a Parent PLUS loan vs taking a private parent student loan.
Parent PLUS loans are a type of federal student loan that’s available only to parents of students enrolled in an accredited college. The student you’re taking the loan for must be your biological or legally adopted child. Grandparents and legal guardians are not eligible to apply for Parent PLUS loans unless they have legally adopted the student.
These loans have a fixed interest rate set by the federal government for the current academic year. A new rate is set on July 1 every year. All PLUS loans taken during that academic year will have the same interest rate. That rate remains the same throughout the life of the loan.
If you wish to apply for a Parent PLUS loan, you’ll need to first fill out the FAFSA (Free Application for Federal Student Aid) along with your child. After this is done, you’ll also need to fill out and submit a separate Direct PLUS Parent Loan application. Ask the financial aid office at your child’s school if they have any special requirements or procedures for filing this application.
Private parent student loans are issued by non-government financial institutions such as banks and credit unions. Only parents or legal guardians of undergrad college students are eligible for parent student loans. The funds can be used to cover all types of school-related expenses.
College students typically do not have a high enough credit score to qualify for lower interest rates. The higher interest rate could add thousands of dollars in accrued interest to their loan over the term of the loan. This is unnecessary. If you have good credit, you could score a parent student loan at a much lower interest rate.
If you’re hesitant about assuming full responsibility for your child’s education loan, consider cosigning a loan. With a cosigned loan, your child will benefit from the lower rate while also sharing responsibility for the loan with you.
There’s no single type of loan that’s best for everyone. The best parent student loan for you will depend on your income, credit history, financial goals, and other financial commitments. Take time to compare the different types of parent student loans that are available and identify one that best suits your needs.
If you have poor credit, a Federal Direct Parent PLUS loan may be the best option for you. This is because credit history is not a factor that goes into approving your application. Nor is it a factor in determining the interest rate you’ll pay on the loan.
If your credit is good, a private parent student loan may be the better option for you. With a good credit history, you’re more likely to qualify for a low-interest rate, which could save you thousands of dollars in interest over the loan term.
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