A parent loan is money a student’s parent or guardian borrows to help pay for school. The loan is entirely in the parent’s or guardian’s name and they are taking full responsibility for repaying the loan. Like other student loans, a parent loan is used to cover college-related costs, such as tuition, supplies, or room and board.
There are two parent student loan options:
- Federal Direct Parent PLUS Loan
- Private Parent Student Loan
Each have different application processes and requirements, so let’s take a closer look and then explore some of the benefits and drawbacks.
What Is a Parent PLUS Loan?
The PLUS Loan for parents is the only parent-specific federal student loan. They come with a fixed interest rate and a standard repayment term of ten years. Parents can borrow up to the cost of attendance, minus other financial aid the student receives. Funds are disbursed directly to the school.
According to the Department of Education, a parent eligible for a Parent PLUS student loan must be the biological or adopted parent of a dependent undergraduate student. Grandparents and legal guardians do not qualify to take out parent loans unless they have lawfully adopted the student.
Even though parent PLUS loans share many of the same features as other federal student loans, there are some important differences.
Federal parent PLUS loans don’t come with an automatic grace period, so payments will be due as soon as funds are disbursed to the school. They also are not eligible for the popular income-based repayment program (IBR).
And, unlike other federal student loans, parents applying for a PLUS loan must undergo a credit review.
How Do I Apply for a Federal Parent Plus Loan?
The first step is for parents to fill out the FAFSA (Free Application for Federal Student Aid) with their child.
Then, there is a separate application for Direct PLUS Parent Loans, which must be submitted. Most schools use an online application form, but some have their own process, so be sure to ask the financial aid office.
What Credit Score Do You Need for a Parent PLUS Loan?
There is no specific credit score requirement to get Parent PLUS Loan, however a credit review is required to check for any adverse credit history such as bankruptcy, repossession, and foreclosures. Check the Federal Student Aid website for specifics.
What Is a Private Parent Loan?
A private parent loan is issued by a non-government entity like a bank or credit union to a qualifying parent or guardian of an undergraduate college student to help pay for school-related expenses.
Private lenders each have their own terms, eligibility criteria, applications, and interest rates, which can be fixed for variable. Typically, these are determined through factors such as credit history and income review.
Benefits and Drawbacks of Parent Loans
Parent student loans have several useful applications but as with all loans, it’s important to fully understand the terms.
Parents want to see their child excel in school, and many want to help by paying a portion or all of college. Reducing a student’s post-graduation debt with a parent loan can help them focus on school, kick start a career, and prepare them for their next big investment such as a car or home.
Parents carry the full responsibility to repay the parent loan but they can ask their children to contribute without being subject to the same responsibilities as they would if the loan was in the student’s name. This gives them the experience of paying bills and borrowing without having to take on the risk.
Another benefit is that interest on all student loans, including parent loans, is tax deductible. Borrowers may be able to deduct a portion or all of the amount of parent student loan interest paid.
One of the biggest pitfalls of a parent loan is the financial obligation the parent accepts. Making on time payments can help your credit score, but missing or late payments can also hurt your credit.
Cosigning as a Borrowing Option for Parents
While a parent loan gives full responsibility for repaying the loan to the parent, cosigning gives equal obligation to the cosigner and the borrower. The loan will appear on both credit reports and payment history – good and bad – will affect both people on the loan. Most undergraduate students don’t have the credit history to qualify for private student loans on their own and are likely to need a cosigner.
Where Do Parent Loans Fit into the Financial Aid Picture?
It’s important to explore all of your options, talk to loan providers and consult with university financial aid officers to make smart financial choices for you and your family.
Parent loans are only one of the tools that can be used to pay for college. Before considering any type of loan, parents should encourage their child to find aid that does not need to be repaid such as grants and scholarships. Then they can consider using any savings or income to cover the costs. If there’s still a gap in funding, a parent loan might make sense if you can afford and are comfortable taking full responsibility of repaying the loan.
Learn more about how families use loans to pay for college.