As a parent, it’s natural to want to do anything you can to help your child. So it’s no surprise that some 3.7 million parents had outstanding loans through the federal student loan program as of the first quarter of 2022, according to data from Federal Student Aid. If you’re considering helping your child by taking out parent student loans, here’s what you should know.
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Find the Best Student Loans for You
College Ave exclusively offers student loans. Founded in 2014 and based in Wilmington, Delaware, College Ave offers undergraduate, graduate and parent loans for students enrolled at schools affiliated with College Ave in all 50 states and the District of Columbia. College Ave’s advantage is speed, with applications that take a few minutes to complete and instant decisions.
Earnest is an online lender offering private student loans to college and graduate students, as well as student loan refinancing. The company was founded in 2013. Borrowers can choose their own loan terms to fund up to the full cost of their education.
SoFi is an online lender founded by Stanford business school students in 2011. SoFi offered student loan refinancing as of May 2012, and the San Francisco-based company added private student loans in 2019. Choose from undergraduate, graduate, law, MBA, health profession or parent loans with no fees.
Education Loan Finance, also known as ELFI, is a student loan program offered by Tennessee-based SouthEast Bank since 2015. The company provides private student loans and refinancing options for private and federal student loans.
Citizens Bank was founded in the late 1800s in Rhode Island. Today, it’s one of the largest commercial banks in the U.S. Branches are concentrated in the New England, mid-Atlantic and Midwest regions.
Credible is a loan comparison marketplace that allows would-be borrowers to shop around for student loans and student loan refinancing that meet their needs. The company was founded in 2012 in San Francisco as a tool to empower borrowers to shop rates and products.
Sparrow, founded in 2020, is an online marketplace where students and parents can fill out a single application to see whether they qualify for loan offers from a variety of lenders. Although Sparrow is not a lender, the free service allows you to compare rates across lending partners. Sparrow is also available to international students.
Best for fixed APR
The Rhode Island Student Loan Authority is a nonprofit quasi-state authority that provides college financing to students and parents. The lender specializes in providing loans to Rhode Island residents and students, though not all loans have residency requirements.
Best for no fees
Discover Bank has been operating for more than 100 years, and since 2010, it has offered private student loans to students attending more than 2,400 colleges and universities. Loans of up to 100% of education costs with fixed or variable rates are available.
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Best for speedy credit decisions
Splash Financial is a student loan refinancing marketplace that uses its network of banks, credit unions and other lenders to match borrowers with refinancing options. Splash Financial is based in Cleveland and can help U.S. citizens and permanent residents refinance federal, private and Parent PLUS loans. Splash Financial also offers a specialized refinance program for doctors and dentists completing residencies and fellowships.
Best for parent refinance options
Laurel Road offers refinancing for undergraduate and certain associate degrees, but is not offering graduate loans for the 2022-2023 academic year. Parent loan refinancing through Laurel Road allows refinancing of federal parent and private parent loans, and offers qualifying students the opportunity to assume the debt. In 2019, Laurel Road became part of KeyBank, which offers community and corporate banking services. Laurel Road’s student loans are serviced through the Higher Education Loan Authority of the State of Missouri, also known as MOHELA, and the company is headquartered in New York City.
U.S. News Survey
U.S. News Survey: Many Parents Regret Taking Out Parent Student Loans
According to an August 2022 U.S. News survey, 43.4% of parents who helped their children pay for college by taking out a parent student loan and are currently holding a balance regret taking out the loan in the first place. The same survey found that 24.8% of respondents were surprised that they would need to borrow any money to pay for their children’s education. Three-quarters of respondents also say that they have had to delay certain financial milestones, like retirement, because of their parent student loan debt.
Read additional analysis of this survey from U.S. News’ loans expert Erika Giovanetti.
U.S. News Survey Methodology
- U.S. News ran a nationwide survey of 1,208 respondents through PureSpectrum between Aug. 18 and 24, 2022. Only people with parent student loan debt answered questions.
- The survey sample drew from the general American population, and the survey was configured to be representative of this sample.
- The survey asked 13 questions relating to parent student loans.
Survey Results
A parent student loan is a type of federal or private student loan that’s designed specifically for parents who are helping a child pay for school.
These loans tend to have higher interest rates and fees than undergraduate student loans. However, parent loans can also come with higher limits, which could come in handy if your child is attending an expensive school and needs more financial aid than the Department of Education offers.
When it comes to how parent student loan funds can be used, they’re generally no different from what a student can do with a traditional student loan. This means the funding must be used to pay for education-related expenses such as tuition, books and housing, and the borrowing limit is determined by the school’s certified cost of attendance.
Pros
- There isn’t a cap on how much you can borrow. Parent student loans can cover the cost of attendance left after other aid is applied.
- Interest rates for federal loans are fixed and not based on credit.
- Federal parent student loans are eligible for the Income-Contingent Repayment plan.
Cons
- Unlike other federal student loans, a parent student loan requires a credit check, so you might not get approved if you have an adverse credit history.
- Federal parent student loan interest rates are higher than for federal student loans.
- There isn’t an automatic grace period, usually six months after graduation, like with other federal student loans. Parent student loan borrowers will need to contact their loan servicer to request deferment or otherwise immediately begin repayment.
There are two types of student loans that parents can choose from: Parent PLUS Loans and private parent student loans.
Parent PLUS Loans
The Direct PLUS Loan program is a federal student loan program and includes Parent PLUS Loans. Only biological, adoptive parents or, in some cases, stepparents, are eligible to apply for a Parent PLUS Loan, so it’s not an option if you’re a grandparent or other guardian. Additionally, Parent PLUS Loans are only usable for undergraduate educational costs, so they aren’t an option to help a child get through graduate school.
When you apply for a Parent PLUS Loan, which you’ll do by filling out the Free Application for Federal Student Aid, or FAFSA, the Department of Education will run a credit check to ensure you don’t have any adverse credit items on your reports. Examples include significant delinquencies and collection accounts or a recent foreclosure, bankruptcy or repossession.
Parent PLUS Loans come with the highest interest rates of all federal student loans, but they’re standardized, so everyone who qualifies gets the same rate. For loans disbursed before July 1, 2023, the interest rate is 7.54%, plus a funding fee worth 4.228% of the total loan amount.
Borrowers are limited to just one of the federal program’s four available income-driven repayment plans – the Income-Contingent Repayment Plan. However, parents will need to consolidate their Direct PLUS Loans into a Direct Consolidation Loan before repaying under the ICR plan.
Private Parent Student Loans
These loans are offered by private lenders outside of the federal student loan program. As a result, they don’t qualify for federal benefits.
When you submit an application for a private parent student loan, the lender will run a credit check to determine your creditworthiness. Your approval, as well as the terms of the loan, are dependent on your credit history, income and other factors.
Interest rates can vary from lender to lender, as well as from borrower to borrower. One benefit of private parent student loans is companies typically don’t charge an upfront loan fee as the federal government does. Unlike the federal government, private lenders don’t offer income-driven repayment plans.
Find the Student Loan That’s Right for You
Before you start shopping around for parent loans, it’s important to consider whether borrowing money is the right decision.
“Parents need to think about how the additional parent debt impacts their own financial goals,” says Matthew Carpenter, managing partner of College Funding Services and chief strategy officer at College Aid Pro. “Will this harm plans for retirement, their daily lifestyle or household budget? What is the likelihood of a return on the investment?”
Also, because parent student loans tend to be more expensive than undergraduate student loans, it may make more sense to have your child apply for student loans, says Travis Hornsby, founder and CEO of Student Loan Planner. Then once your student receives the financial aid award letter, you may choose to borrow via parent loans to cover the gap.
If you’re certain you want to apply for parent student loans, follow these steps to help you choose the right option for you and your child:
- Check your credit score. A high credit score and a low debt-to-income ratio are key to qualifying for the best interest rates private student loan companies have to offer. If you can manage to score a lower interest rate than what the federal government offers, it could save you big time. But if your credit is average, Parent PLUS Loans may give you a better offer.
- Shop around. If you’re considering private loans, it’s crucial that you take the time to compare rates from several lenders. Remember, different lenders can have different interest rate ranges, and they may also differ in how they underwrite applications. The good news is that you can get prequalified with multiple lenders to get rate quotes and there’s no hard credit check or commitment involved.
- Think ahead. Even if you can score a lower interest rate on a private loan, it might not be the right fit. “Where private loans may have lower rates overall, they are the least flexible in repayment terms,” says Carpenter. “Federal loans may have higher interest rates – not always – but they offer the most flexibility in repayment terms, which helps to protect the borrower in case of job loss or another unplanned event.”
If you’re applying for a Parent PLUS Loan:
- Fill out the FAFSA with your child, with the child’s information as the student and yours as the parent.
- Fill out a separate application for Parent PLUS Loans after your child has submitted the FAFSA.
- Make sure you don’t have a freeze in place on any of your credit reports.
- Sign the promissory note.
- If there are excess funds beyond what’s paid to the school for tuition and fees, designate whether the school should send the remaining balance to you or your child.
“Be aware that Parent PLUS Loans don’t have a grace period,” says Hornsby. “Repayment starts immediately when you take out the loan. You can always request deferment, but there isn’t a guarantee you will get the loans deferred.”
With private student loans, the process doesn’t require filling out the FAFSA, but it’s still a good idea for students to fill out the form in case they qualify for any other types of federal financial aid.
To apply for a private parent student loan:
- Shop around and compare rate quotes from multiple lenders.
- Choose the best lender for you and submit an application via its website.
- Provide any documentation required by the lender, such as pay stubs and a government-issued photo ID.
- Determine how long the repayment term will be.
- Once the lender returns a final offer, decide whether to accept.
- If you accept, complete the process by agreeing to the terms and conditions of the contract.
Once you’ve completed the process, the private lender may choose to send the loan funds directly to you or disburse them to your child’s school. You’ll typically start making payments immediately.
As the borrower on a parent student loan, you are the only person responsible for repaying it. Even if children agree to take over payments after graduation, they’re not legally obligated to make good on that promise.
By refinancing, it’s possible to transfer parent student loan debt to the child after graduation, says Hornsby. “This is an option that a lot of parents and their children do,” he adds. “You can transfer the loan by having your child refinance it into their name as long as they have good credit history and are able to make the student loan payments.”
Because of the responsibility associated with parent student loans, it’s crucial that you consider how taking one out can impact your financial well-being, both now and in the future.
- Grants. If your child filled out the FAFSA, he or she may qualify based on financial need. Grants don’t need to be repaid.
- Scholarships. Based on merit and achievement, this type of gift aid can give your child a good amount of financial help.
- Work-study. If your child doesn’t mind working while in school, look into work-study programs. To be eligible, your student must complete the FAFSA.
- Federal student loans. Unsubsidized and subsidized loans may not cover the entire amount of your child’s education, but they can bring the cost down. Your student must fill out the FAFSA to see if he or she qualifies. And as a parent, your name won’t be attached to the debt.
- Private student loans. These may have lower interest rates than parent student loans. Your child can apply for these, but you may need to co-sign if your student doesn’t have a job or good credit.
- Home equity loan. If you have enough equity in your home and can qualify, a home equity loan could provide funds for your child’s college tuition. The interest rate may be lower than parent student loans, but you’re risking your home as collateral.
U.S. News selects the Best Loan Companies by evaluating affordability, borrower eligibility criteria and customer service. Those with the highest overall scores are considered the best lenders.
To calculate each score, we use data about the lender and its loan offerings, giving greater weight to factors that matter most to borrowers. The scoring factors for private student loan providers are customer service ratings, fixed APR, variable APR, loan product availability, minimum and maximum loan terms, minimum and maximum loan amounts, minimum FICO score, and online features.
The weight each scoring factor receives is based on a nationwide survey on what borrowers look for in a lender.
To receive a rating, lenders must offer qualifying loans nationwide and have a good reputation within the industry. Read more about our methodology.
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