Published in Borrow
Written by Kristyn Pilgrim

Parent Loans for College: How They Work & Best Providers

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    Parent Loans for College: How They Work & Best Providers

    Published in Borrow
    Written by Kristyn Pilgrim

    Getting a Parent Loan for College

    If you are taking a parent loan for college, it is important for you to be in a strong financial position. While many student loans require that the young adult pays them off over time with their degree helping them get a well-paying job) parent loans officially rely on you (and you alone) to pay them back.

    While it involves taking on a certain amount of financial responsibility, many parents just like you have found that parent loans are a great option to support their new college student.

    What Is a Parent Loan?

    Any college loan should help to cover the cost of attending a college or university. Loans may cover the entire cost of a college education or only part of it.

    Many families set aside college funds for their children, and many students find other sources of financial aid like federal grants or local scholarships. A parent loan is often one among several sources of funding that students can use to cover their full tuition, housing, and books costs.

    If you are thinking about taking out a parent loan to support your child’s education, you should first consider whether you and the household you’re responsible for, can actually afford to take on this debt. REMEMBER – there are multiple years to college and you may have multiple children in the household. Do the back of the envelope math to see if this is going to fit your long-term household budget:

    {Rough annual amount needed X number of years of college X number of kids you might end up borrowing for = the total principal that you may be saddled with}

    You can run a quick spreadsheet equation to crudely calculate what the monthly payment on this total principal might be. Roughly speaking, each $10,000 borrowed for 10 year repayment at 8% interest will result in a monthly payment of about $120. It’s important for you to run the math on any loan, including parent loans for college. Once you’ve done the math, you should then consider:

    It’s important for you to run the math on any loan, including parent loans for college. Once you’ve done the math, you should then consider:

    • Other debts you are responsible for, including a mortgage, credit card, car loan, etc.
    • Whether you already struggle to pay any of your outstanding debts.
    • Your progress toward saving for retirement or other savings goals.
    • Whether your child (the college student) has taken on an appropriate amount of student debt, such as federal student loans or private student loans.

    Some families work out an informal understanding with their college student that the future graduate will take on some of the parent loan obligation down the road. This might be feasible if the student has a manageable student debt burden of their own and if they get established with a good, steady job. You should discuss this understanding clearly and  option with their college-bound child to repay the loan over several years. Like student loans given directly to college students, much of this repayment is contingent on finding a great job since they will have a higher degree that opens up many more career options.

    Other families approach things in a more straightforward way: parent loans for college are the parent’s repayment responsibility and student loan repayment is the (eventual) graduate’s responsibility.

    Either way, if the promissory note lists the parent’s name: the parent is ultimately responsible.

    What Is the Difference Between PLUS and Private Parent Loans for College?

    As you gather financial resources for your child’s college tuition, and you begin to look at parent loans, you may have run across two different terms: private parent loans and parent PLUS loans. While they ultimately function the same way, there are some important differences between PLUS loans and private parent loans for college.

    • PLUS (federal) loan: The parent PLUS loan (Parent Loan for Undergraduate Students) is a direct student loan from the federal government that is available for parents with undergraduate students who are still dependents. Legal guardians who have officially adopted the new college student may also take out parent PLUS loans for college.

      This loan is not available for parents of graduate students or for students who are not their parents’ dependents.

      The PLUS Loan has one main advantage: it is relatively easy to qualify for the loan. The vast majority of applicants who have even below-average credit, will qualify. And even if the borrower has an adverse credit history, they may still be able to get the loan with the participation of a cosigner (called an “endorser” in government terminology). PLUS offers a fixed interest rate (currently 7.08% and an origination fee of 4.236%.

      The annual loan limit for a parent PLUS loan is the full cost of attendance at the college or university, minus all other sources of financing like direct loans, grants, scholarships, and savings going toward tuition. The cost of attendance for colleges includes:
      • Tuition and related fees.
      • Room and board.
      • Books and supplies.
      • Equipment like laptops or laboratory equipment.
      • Transportation, including parking decals.
      • Miscellaneous school-related expenses.

    To qualify for this type of federal loan, start with the Free Application for Federal Student Aid (FAFSA). Once you fill out the information, StudentLoans.gov will provide the rest of the application for the parent PLUS loan for college. Unlike other FAFSA loans and grants, in the case of a parent loan, the parent must request the loan and have their name associated with the payment plan.

    Divorced parents of dependent students can each take out a parent PLUS loan for their child, as long as they sign separate master promissory notes (MPNs) and the loans together do not exceed PLUS loan limits.

    Repayment of the loan begins 60 days after full disbursement of the money, although payment can be deferred while the student is in school, during a six-month grace period after the student graduates, or if the student’s enrollment drops below half-time. Standard repayment term on parent PLUS loans is 10 years. 

    As a federal education loan, PLUS is eligible for flexible repayment options, such as graduated and extended repayment plans. PLUS can also be refinanced into a federal consolidation loan, which then allows the borrower to take advantage of various repayment options based on the borrower’s specific income. PLUS borrowers may be eligible for deferment and forbearance should they encounter financial hardship. In general, as a federal education loan, PLUS has pretty flexible repayment options.

    To sum things up, PLUS is widely available and has flexible repayment options. However, the interest rate and fee might make the PLUS loan a more expensive than a private parent loan for some borrowers.

    • Private parent loan: While access to the federal parent PLUS loans is important for many families, getting a private parent loan from a bank or lending institution may make more sense for parents, as the cost of borrowing could be lower than PLUS.
      Private parent loans will require the borrower to pass a relatively stringent credit test. Borrowers generally need to have a credit score of 680 or higher, and a total resulting debt-to-income ratio (all monthly debt payments divided by all monthly gross income) not to exceed 35-40%. Actual credit requirements will vary among lenders. 

    Most private parent loan lenders offer fixed and variable rate structures. And for each loan structure, lenders typically quote a range of possible rates. Borrowers with stronger credit and income will receive rates at the lower end of the range; borrowers with weaker credit generally qualify for rates at the upper end of the range. Currently, no private parent loan products have any fees attached to them.

    Families do not need to complete the FAFSA form to apply for and receive a private parent loan. However, lenders will subject the parent loan to “certification” by the college or university prior to disbursement. This step ensures that the student and family do not borrow more than the cost of attendance, less other aid received.

    Lenders typically offer a range of repayment lengths (called “term”) for private parent loans. Usually from 5-15 years. Generally speaking, a longer repayment term will see slightly higher interest rates. If a private parent loan borrower encounters financial difficulty, there will be less flexibility than through the federal PLUS loan program, though most lenders have some provisions for forbearance or deferment in extreme cases.

    In sum, private parent loans are harder to obtain than the federal PLUS loan and have more restrictive repayment options. BUT some borrowers may be able to get a lower interest rate than PLUS offers and benefit from no origination fee. In general, if the parent borrower has good credit and income, it is worth applying for a private parent loan to see what rate the lender offers. If the rate is lower than PLUS (or even a bit higher, since the private parent loan won’t have an origination fee), going with the private parent loan might make more sense.

    Top 3 Private Parent Loan Options

    Flexibility is a major reason that you may choose a private parent loan over the parent PLUS loan. Here are the top three institutions providing private parent loans for college:

    • Sallie Mae: One of the leading private student lending institutions, Sallie Mae offers a 5.49% starting fixed annual percentage rate (APR) or variable rates starting at 5.62% APR. These APRs are based on your credit history.

      You can get loans large enough to cover the entire cost of your child’s school costs, with no penalties for paying early, auto payment options that reduce your APR, and even benefits like homework help.
    • Wells Fargo: Parents, relatives, and even family friends can help students get through college with Wells Fargo’s private parent loans. There are many discount options to lower your interest rate.

      You can begin repayment immediately, or you can request to pay just the interest on the loan for up to 48 months (four years) while your child gets their undergraduate degree. You may be able to deduct the interest from your taxes. If you have other loans with Wells Fargo, you can easily consolidate all your loans and make one monthly payment.
    • College Ave: A company specializing in student loans, including private parent loans, this organization has no origination fees or prepayment penalties. They offer both fixed and variable rates for parents taking out loans for their college-bound kids.

    You can get repayment plans ranging from 5 to 15 years and a 0.25% discount for enrolling in autopay.

    Frequently Asked Questions (FAQ)

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