Private Parent Loans for College

In Paying for College on May 11, 2016

Private parent loans, also called student loans for parents, are a new option for financing a college education. These loans are borrowed by the student’s parent or other family members, not the student. Private parent loans offer interest rates and fees that are competitive with the Federal Parent PLUS loan. Borrowers must have very good or excellent credit scores.

While private student loans have often required a creditworthy cosigner, such as a parent, there weren’t any private parent loans until 2010.

Federal Parent PLUS loans were established by Congress in 1980 and continue to be available today. Private lenders were able to make Federal Parent PLUS loans through the Federal Family Education Loan Program (FFELP) until July 2010, when Congress eliminated the FFEL program. Wells Fargo introduced the first private parent loan at this time, to replace the Federal Parent PLUS loan in their lineup.

However, it wasn’t until Congress increased the interest rates on federal education loans in 2013 that it opened the door for a proliferation of private parent loans.

The College Cost Reduction and Access Act of 2007 (P.L. 110-84) implemented a phased-in interest rate reduction on the subsidized Federal Stafford loan for undergraduate students, reducing the interest rate from 6.8 percent in 2007-08 to 3.4 percent in 2011-12. Subsequent legislation extended the 3.4 percent interest rate for a year. But, the interest rate was scheduled to revert to 6.8 percent when the legislation expired.

Faced with the prospect of doubling the interest rate on the subsidized Federal Stafford loan, Congress decided to switch all federal education loans, including the Federal PLUS loan, to a new interest rate formula which pegged each year’s new loans to a fixed interest rate based on the 10-year Treasury Note, subject to certain caps. The new interest rates on Federal PLUS loans were capped at 10.5 percent, which is 1.5 percentage points higher than the previous maximum interest rate on Federal Parent PLUS loans since 1992-93.

With this change, private lenders could undercut the cost of the Federal Parent PLUS loan for borrowers with very good or excellent credit. Several lenders have introduced new private parent loans, including Sallie Mae, Citizens Bank, SoFi and a few state loan programs. Wells Fargo continues to offer a private parent loan program.

Private parent loans present parents with a tradeoff between a lower-cost private parent loan and the superior repayment benefits of the Federal Parent PLUS loan. Federal Parent PLUS loans offer death and disability discharges, longer deferment and forbearance options, and the option of longer repayment terms. But, these differences are narrower than for federal student loans, which also offer income-driven repayment plans and public service loan forgiveness. Parents also have more experience managing their money and so may be better able to evaluate whether they will need the federal benefits.

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