5 Times The Federal Parent PLUS Loan Is A Mistake

Parents today are borrowing more — and more often — to finance their children’s education. Most parents who borrowed for a child’s education reported a combined student loan balance of $40,000 or more, according to Student Loan Hero’s Parent Student Loan Survey.

But is the Parent PLUS loan a good idea? In the following five circumstances, the answer is probably no.

5 times parent loan PLUS is not a good idea

Here are several situations in which a federal parental loan PLUS probably doesn’t make sense, along with our suggestions on how to find better options for you.

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1. Your child has not reached their borrowing limits
2. You could pay less with private student loans
3. You want your student to share responsibility for the loan
4. You help your child pay for college
5. You can’t afford the payments

1. Your child has not reached their borrowing limits

Before taking out a Parent PLUS loan, consider maximizing other student loans. Subsidized Direct Loans and Unsubsidized Direct Loans, both of which are only available to students, could be more cost effective.

With an interest rate of 5.05% and loan fees of 1.062%, these student loans have significantly lower costs than parent PLUS loans, which currently have an interest rate of 7.08% and a loan fee of 4.236%.

Because of these lower fees, your child’s federal student loans will cost less, which means PLUS parent loans would not be a good idea. So, before taking out parent PLUS loans, families should look to more affordable options and borrow up to student loan limits.

These limits are between $5,500 and $7,500 per year for Unsubsidized Direct Loans and Subsidized Direct Loans for Undergraduates, and $31,000 in total.

2. You could pay less with private student loans

Subsidized Direct Loans and Unsubsidized Direct Loans aren’t the only potentially cost-effective alternatives to a parent PLUS federal loan. You might be better served by choosing a private student loan for parents over federal options.

Private student loan APRs are often lower than the 7.08% charged on parent PLUS loans. We list our preferred private student loan lenders with rates that start at less than 3.00%, for example.

Additionally, many lenders do not charge origination fees on private student loans. Even when they do, it’s often less than the 4.236% charged on Parent PLUS loans.

There is a catch, however: what you pay on a private student loan will depend on your credit score and other loan qualifications. While all parent PLUS borrowers are charged the same rate, private lenders set interest rates based on each borrower’s credit score.

Usually, only applicants with excellent credit will qualify for private student loan rates low enough to beat Parent PLUS loans. Shop for private student loans for parents and compare offers to see if you would pay less with private lenders than with a parent PLUS federal loan.

3. You want your student to share responsibility for the loan

Parents often have to get involved in borrowing when students reach their federal student loan limits. If a student cannot borrow more on his own, but still has tuition to pay, he can only get additional loans with the help of mom and dad.

For parents who want their child to be primarily responsible for this debt, cosign a student loan may be the preferable choice. This option is only available for private student loans, however. There are no federal student loans that a student and parent can co-sign together.

Co-signing allows you to help your child qualify for a student loan – but assuming your child will be primarily responsible for paying it back. Keep in mind that you are also legally responsible for this debt as a co-signer. If your child stops paying for any reason, you will be required to reimburse them.

Yet having your child as a co-signer makes that student debt legally owned and shared. This differs from PLUS Parent Loans and Private Parent Loans, which are held in the parent’s name only and for which students cannot be held liable.

4. You help your child pay for college

Perhaps your student is heading to graduate school, medical school, law school, or another professional program. If you want to help them pay for higher educationprivate student loans will be your only option to do so.

The Federal Parent PLUS Loan is only available to parents of undergraduate students. If you want to borrow to help pay for your child’s college education, private student loans are the way to go.

Like undergraduates, however, graduate students might have access to federal aid and student loans which are a better deal. Discuss all borrowing options with your graduate student to find the best and most affordable way to finance their degree.

5. You can’t afford the payments

If you’re considering a federal parent PLUS loan, be careful how much you borrow. These student loans should be used with care and caution, and you should only borrow what you can afford to repay.

But the limit on how much you can withdraw with Parent PLUS loans has more to do with your child’s tuition than what you can afford to pay back. While private lenders usually look at your debt to income ratio when they assess your application, parent PLUS applications do not include such income requirements.

Parents can borrow the amount needed to fully cover their child’s education costs. But just because you can borrow the loans doesn’t mean parent PLUS loans are a good idea if you can’t afford to pay them back.

Make sure your payments will be manageable when added to the debt you already have. Use our student loan payment calculator to estimate how much you would pay each month on your new loan.

Keep in mind that this is a debt that you will pay off over the next 10 years. If you can’t afford to pay it back, it wouldn’t be a good idea to take out a federal PLUS parent loan.

Rebecca Safier contributed to this report.