The desire to help your kid pay for college so they can focus on their studies is a strong one, but it’s important to consider your options when it comes to borrowing money. Parents have a couple of options for borrowing to help pay for their child’s college education. They can borrow a Parent PLUS Loan — a type of federal loan — or a private student loan to help their child pay for college. Though, it may not always make sense for parents to take on debt on behalf of their child’s education.
Read on for a high-level overview of which types of student loans you could apply for, as well as some advantages and disadvantages of taking out those loans in your name.
Key Points
• Parents can consider two primary options for financing their child’s college education: Parent PLUS loans, which are federal loans, and private student loans from individual lenders.
• Parent PLUS loans offer fixed interest rates and flexible repayment options, but they require the child to complete the FAFSA before applying.
• Private student loans may provide lower interest rates for parents with strong credit histories and allow for fixed or variable rates with customizable repayment terms.
• Taking out loans in a parent’s name can reduce financial burden on the child, but repayment responsibility and the potential negative impact on credit scores must be considered.
• Before resorting to loans, maximizing federal aid, scholarships, and grants is usually recommended to minimize future financial obligations.
What Are Parent Student Loan Options?
As mentioned, parents interested in borrowing a loan to help their students pay for college have two main options. The first is a Parent PLUS loan, a federal loan available through the Direct Loan program. The other is borrowing a parent loan from a private lender.
Parent PLUS Federal Student Loans
Parent plus loans are a type of federal student loan that can be borrowed by the parent of an undergraduate student to help their child pay for college education costs. The benefits of a Parent PLUS loan can include:
• A fixed interest rate (for loans first disbursed on or after July 1, 2023, and before July 1, 2024, the interest rate is 8.05%)
• Deferment under certain conditions
• Flexible repayment options
• Possible eligibility for Public Service Loan Forgiveness
To apply for a Parent PLUS loan, your child must first file the Free Application for Federal Student Aid, also known as FAFSA®. Then, eligible parents of undergraduate students can fill out the Direct PLUS Loan Application online.
It’s not possible to transfer a Parent PLUS loan to your child. However, Parent PLUS refinancing with a private lender may allow your child to refinance a Parent PLUS loan in their name.
Keep in mind that your child may be eligible for federal student aid including federal loans, scholarships, and grants too. If your child is taking out federal student loans, they may be eligible for:
• Direct Subsidized Loans. These loans are subsidized by the federal government and students are not responsible for paying accrued interest while they are enrolled, during the loan’s grace period, or during qualifying terms of deferment.
• Direct Unsubsidized Loans. These loans are not subsidized by the federal government and student borrowers are responsible for accrued interest costs on the loan while they are enrolled in school.
• Direct PLUS Loans (for graduate school). These loans are available for graduate students.
Depending on demonstrated financial need, your child may qualify for a combination of these loan types in addition to scholarships, grants, or work-study. However, if all other federal aid is exhausted, the Parent PLUS loan might be an option to supplement your child’s tuition payments after federal aid, scholarships, or grants.
Private Student Loans for Parents
When federal student loan options are exhausted, some students and parents may turn to private loans to help fund their education. Parents can take out a private loan in their own name to pay for college for their student. If you have a strong credit history, you might consider a private loan over the PLUS loan — there’s a chance you could potentially qualify for a lower interest rate.
With a private student loan, you may have the option of a fixed- or variable-rate loan, potentially giving you more flexibility on repayment. With a private student loan, you might have the chance to choose the term length of a loan as well.
Your child can also apply for private loans, but in many cases, they’ll require a cosigner.
Private Student Loans for Parents vs Parent PLUS Loans
This table provides a high-level overview of the differences between private student loans for parents and Parent PLUS loans.
| Private Student Loans for Parents | Parent PLUS Loans |
|---|---|
| To apply, interested parents will need to fill out an application with an individual private lender. | To apply, students first need to fill out the FAFSA®. Then parent’s can fill out the Direct PLUS Loan Application on the Student Aid website. |
| The application process will usually involve a credit check. This will be used to help determine the loan terms an applicant qualifies for, in addition to other factors. | There is a credit check, however it will not be used to determine terms like the interest rate. Interest rates on Direct PLUS loans are set annually by congress. |
| Interest rates may be fixed or variable. | Interest rates are fixed. |
| Repayment plans will be determined by the individual lender. | PLUS loans qualify for some federal repayment plans. |
Pros and Cons of Taking the Loan Out in Your Name
Taking out a student loan for your child in your name — federal or private — could mean less of a financial burden on your child as they enter college. Since the loans are in your name, it’s not up to your child to pay them, even after a degree is earned.
The Pros
Borrowing can be a tool to help you pay for your child’s education. If you can afford to make the loan payments without sacrificing your own financial security, this could be a helpful move for your child.
Another pro is that the loan payments will be made in your name — that means they’ll count toward your credit history. If you’re able to make all of the loan payments on-time, it could prove to have a beneficial impact on your credit score.
If you have a strong credit history, you could potentially qualify for a more competitive interest rate than your child could.
The Cons
The most obvious con is that while you’ll be able to help your child pay for college, you’ll need to repay the money with interest. Other types of aid like scholarships, grants, and Direct Subsidized or Subsidized loans borrowed by your child are generally prioritized over a parent loan.
Again, because the loan is in your name, any late payments or issues will be attributed to your personal credit history. Things like late payments have the potential to impact your credit score.
There’s nothing wrong with wanting to borrow for your child’s future, just consider all your options and think about what you, or they, can afford to pay back. It’s almost always a good idea to maximize federal aid and scholarships before resorting to loans of any kind.
The following table provides an overview of some of the pros and cons for borrowing as a parent to help your student pay for college.
| Pros | Cons |
|---|---|
| Parent student loans can allow parents to help pay for their child’s college education. | Loans will need to be repaid with interest. Students and their families generally will prioritize other types of aid that don’t require repayment or that have a lower interest rate. |
| Parent student loans are in the name of the parent borrower. Therefore the parent may benefit from any boost in credit score from making on-time payments. | A parent’s credit score could be negatively impacted if they are unable to make their monthly payments. |
The Takeaway
Parent PLUS Loans are federal loans that allow parents of undergraduate students to help pay for their child’s education. These loans have a fixed interest rate and are eligible for most federal repayment plans.
Parents with a strong credit history may be able to qualify for more competitive interest rates through a private student loan. SoFi offers student loans for parent borrowers. There are no fees, competitive rates for qualifying borrowers, and applications are entirely online.
FAQ
Which type of student loans can parents take out on behalf of the student?
Parents with undergraduate students have two options for borrowing to help their child pay for college. They can borrow a Direct PLUS loan through the federal government or a private loan from a private lender.
Who is responsible for paying back Parent PLUS loans?
Parent PLUS loans are in the parent’s name. The parent is solely responsible for repaying the loan.
What to do if you aren’t able to take out a Parent PLUS loan?
If you aren’t able to borrow a Parent PLUS loan you can consider adding a cosigner to your PLUS loan application. This may help your chances of getting approved. Additionally, if you are applying for a private loan, you may have the option of adding a cosigner which could potentially improve your chances of gaining approval or securing a more competitive interest rate.
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