Private Parent Loans

Several lenders offer private student loans for parents that are intended to compete with the Parent PLUS Loan. Unlike private student loans, where the student is the borrower and the parent is often a cosigner, parents are the only borrower on a private parent loan.

These private parent loans may undercut the Parent PLUS Loan on price, but do not necessarily offer the same benefits as federal student loans.

Loan Costs

When Congress changed the interest rates on federal education loans in 2013, the new interest rates were effectively an interest rate increase masquerading as a decrease. The new interest rates were higher compared with the previous variable-rate formulas. Before July 1, 2006, the variable interest rates on the PLUS Loan were pegged to the 91-day T-bill rate + 3.1%. Since July 1, 2013, the fixed interest rates have been pegged to the 10-year Treasury Note + 4.6%.

The increase in interest rates created an opportunity for private lenders to compete with the Parent PLUS Loan on price. Several lenders have responded by offering private student loans for parents that offer lower fixed rates and lower or no fees than the Parent PLUS Loan.

Loan Benefits

When comparing federal and private student loans, it is important to consider all tradeoffs, such as differences in federal vs. private loan benefits, not just differences in price.

Although federal student loans generally offer superior benefits when compared with private student loans, the differences are narrower when comparing Parent PLUS loans with private parent loans. Unlike federal student loans, Parent PLUS Loans are not eligible for income-based repayment, pay-as-you-earn repayment, and public service loan forgiveness. (There is a loophole that allows some Parent PLUS Loans to qualify for income-contingent repayment, if they are consolidated into a Direct Consolidation Loan first.)

The remaining differences between Parent PLUS Loans and private parent loans are as follows:

  1. Deferments and Forbearances. Parent PLUS Loans can have deferments and forbearances that are up to three years in total duration, while private parent loans can have forbearances that are up to one year in total duration.
  2. Death and disability discharge.  Parent PLUS Loans can be discharged if the borrower dies, the student on whose behalf the loan was borrowed dies or if the borrower becomes totally and permanently disabled.  Some private lenders offer a similar benefit on their private loans (e.g., Sallie Mae, NY HESC, Discover and Wells Fargo), but others do not.
  3. Credit underwriting. The borrower of a Parent PLUS Loan must not have an adverse credit history, but the credit criteria do not consider the borrower's credit scores or debt-service-to-income ratios. Most private parent loans require the borrower to have very good or excellent credit scores. Some have minimum income requirements.
  4. Cosigners. Parent PLUS Loans generally do not require cosigners. However, if the borrower has an adverse credit history, the borrower can still qualify for a Parent PLUS Loan by getting an endorser who does not have an adverse credit history. An endorser is similar in concept to a cosigner. While more than 90% of private student loans require a creditworthy cosigner, private parent loans generally do not require cosigners. Also, when private loans require a cosigner, they often offer a cosigner release option, while Parent PLUS Loans do not offer cosigner release options for endorsers.

Uses for Private Parent Loans

Students should always borrow federal first, since federal student loans, such as Direct Subsidized and Unsubsidized Loans and Perkins Loans, are cheaper, more available and have better repayment terms and conditions than private student loans. But, when students exhaust the loan limits on federal student loans, and parents are thinking about borrowing to help their children pay for school, they should consider the tradeoffs between the price of private parent loans and the benefits of Parent PLUS Loans.

In some cases, the parents may be able to refinance older Parent PLUS Loans with higher fixed rates of 7.9% or 8.5% into lower-cost fixed-rate private parent loans.

Some private lenders allow parents to refinance a Parent PLUS Loan into a lower-cost fixed-rate private student loan, indirectly transferring the debt burden from the parent to the student. Note that this is a new loan with new terms, not a modification to the old loan. Note that there’s a risk that this will burden the student with too much debt, more than the student can afford to repay. Nevertheless, refinancing the debt into the student’s name may make sense a few years after the student graduates, if the student can qualify for a lower interest rate because he or she managed his or her credit responsibly and built a very good credit history. Otherwise, the loan may still require a cosigner, usually the parent, so the parent may still be responsible for repaying the loan if the student is unable or unwilling to make the payments. 

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