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Types of Loans: Parent Loans and Private Loans

Parents can apply for loans as part of a student’s financial aid package. Loans taken out by parents are the sole responsibility of the parents, not the student. There are usually no cumulative limits to the loans that parents can take out to pay for their children’s tuition.

The most common type of parent loan is the Parent Loan for Undergraduate Students (PLUS), though graduate and professional students can borrow money from the PLUS program themselves to finance their education. The PLUS loan is now referred to either as the Parent PLUS or the Grad PLUS.


The interest rate on the PLUS loan is higher, fixed at 7.9%. The government doesn’t subsidize the interest while students are still in school, so students are responsible for the accrued interest during their enrollment.

Private loans make up the third loan option. They are offered by financial institutions and not through the government, which means they are prone to have higher interest rates than federal loans. For this reason, it’s best to exhaust all possible federal alternatives before turning to private loans.

In addition, federal loans offer more repayment choices and are often more generous with forgiveness options.

When applying for a private loan, borrowers usually have the option of taking out the loan by him/herself or to take out the loan with a cosigner. This is usually advantageous because lenders might lower the interest rate depending on how good the credit score of the highest scoring individual is. For example, parents cosigning on a private loan with their child might result in a loan that has a lower interest rate and lower fees since the parents have better credit scores than their kids.

When considering a private loan amount, however, keep in mind that if the money exceeds the amount needed for tuition and school costs, it will be considered an extraneous source of money, which might reduce the amount of federal aid that the school offers a student.

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