Best Parent Student Loans | Find the Best Loan for You | US News

As a parent, it’s natural to want to do anything you can to help your child. So it’s no surprise that some 3.6 million parents had outstanding loans through the federal student loan program at the end of 2019, according to a study by Trellis Research. If you’re considering helping your child by taking out parent student loans, here’s what you should know.

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.

There are two types of student loans that parents can choose from: Parent PLUS Loans and private parent student loans.

The Direct PLUS Loan program is a federal student loan program and includes Parent PLUS Loans. Only biological or adoptive parents 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. Borrowers are limited to just one of the federal program’s four available income-driven repayment plans – the Income-Contingent Repayment Plan.

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.

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, CEO of College Funding Services. “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 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:

If you’re applying for a Parent PLUS Loan, here are the steps you’ll need to take to receive the financing you need:

“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, you’ll need to:

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.