Which is better: Federal Direct PLUS loan or private student loan for parents?

Are you considering taking out a student loan in your name to help your child afford their college education? Then you're probably wondering what options you have.

Parents have two types of student loans available to them:

1. Federal Direct PLUS Loan
2. Private student loan for parents

Both are available to parents who need extra money to pay for the cost of attendance that grants, scholarships, work-study, college savings, payment plans, or student loans (taken out by the student) won't cover.

The federal parent PLUS loan (also known as the Federal Direct PLUS Loan) is administered by the federal government. Approval is based upon the information submitted on the Free Application for Federal Student Aid (FAFSA^®) and the Federal Direct PLUS Loan may have features that a private student loan does not. Private student loans for parents, on the other hand, are administered by private lenders, like Citizens, and require a separate loan application.

So, which financial aid option is best for you? That can vary based on a number of factors and which are most important to you. Below is a rundown of each of those factors to consider when it comes to student loans for parents.

Interest rate

The Federal Direct PLUS loan offers a standard fixed interest rate for all parents that are approved. For the 2024-2025 school year, that interest rate is 9.08%.

Private student loans for parents determine interest rates based on the applicant's creditworthiness. Depending on your credit score and the lender, you may be able to qualify for a lower interest rate. You should research your options to learn more about the current rates available.

A private student loan for parents lets you choose between a fixed or variable rate.

Fees

In addition to being charged interest, the Federal Direct PLUS Loan comes with an additional charge: an origination fee. For the 2024-2025 academic year, that fee is 4.228%.

The federal government charges this origination fee in exchange for the processing and the disbursement of the loan. This loan fee can be charged in one of two ways:

1. The fee amount is added on top of your loan principal
2. The fee amount is subtracted from the amount disbursed

Meanwhile, private student loan lenders — like Citizens — don't charge an origination fee on student loans for parents. The lower interest rates and lack of origination fee can save parents thousands of dollars throughout the life of the loan.

Eligibility

The Federal Direct PLUS Loan has very light credit requirements to get approved, so most parents who want to take out a Federal Direct PLUS Loan will be able to do so. However, the federal government doesn't take as much time to assess your ability to repay the loan.

With private student loans for parents, the credit requirements for approval are much higher. That's what allows private lenders to offer better interest rates. Also, private lenders take considerably more time to assess your ability to repay the loan.

Repayment options

Standard loan repayment for the Federal Direct PLUS Loan is 10 years, although you do have the option to stretch your repayment plan beyond those 10 years. In order to do so, you need to meet one of two requirements:

1. Consolidate the Federal Direct PLUS Loan into a Federal Direct consolidation loan
2. Have more than $30,000 in federal student loans

Assuming you meet one of those requirements, then you're eligible for:

• Extended repayment: Term lengths range from 12 to 30 years, depending on your loan balance
• Graduated repayment: Payments start small and increase every two years for up to ten years

Income-contingent repayment (ICR) — monthly payments based on a percentage of your income — is also available if the Federal Direct PLUS Loan entered repayment after July 1, 2006, and has been consolidated into the federal direct consolidation loan.

With private student loans for parents, repayment options vary by lender. Make sure you research potential lenders to find which one has the repayment terms that make the most sense for you.

Which loan is best for you?

Well, that depends. As you can see, there are a lot of factors to consider when evaluating a loan. If you have an adverse credit history but you really want to help your child fund their college education, then the Federal Direct PLUS Loan might be your best option. However, if your credit report is in good shape, not only could you help fund your child's education, but potentially save money on interest and fees.

The best way to make your decision would be to research private lenders early, apply for the best private student loan(s) for parents that you can find, and see if you get approved. If you do secure a better interest rate than what the Federal Direct PLUS Loan offers, then you may want to consider taking out the private student loan for parents. If you get denied by one or more private lenders, then you could pivot to the Federal Direct PLUS loan.

Are you ready to take the next step?

With a Citizens Student Loan® for Parents^†, you could help your child manage up to 100% of their college-certified costs without sacrificing your future. Plus, with Multi-Year Approval^†, you'll know upfront how much money we'll lend you across multiple years of college. That way, the application process is much simpler in year two and beyond.

Already have Federal Direct PLUS Loans? Learn how you can refinance them^† with a Citizens Education Refinance Loan for Parents^†.

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