As a parent, you want the best for your child, especially regarding their education. But financing a college education can be a daunting task. You may consider taking out a Parent PLUS Loan to cover the costs. But before you do, it’s important to understand why your child should first consider taking out federal student loans in their own name. Here are five reasons why.

Understanding Student Loans

Before we dive into the reasons, let’s first understand what we’re dealing with. There are two main types of loans you might be considering: Parent PLUS Loans and federal student loans taken by a student for their own education. Federal student loans for students come in two types: Direct Subsidized Loans and Direct Unsubsidized Loans.

Parent PLUS Loans are federal loans that parents of dependent undergraduate students can use to help pay for college or career school. The annual borrowing limit for Parent PLUS Loans is the cost of attendance (determined by the school) minus any other financial aid received. This means Parent PLUS Loans can cover a significant portion of the costs.

Direct Subsidized Loans are federal student loans for eligible students to help cover the cost of higher education at a four-year college or university, community college, or trade, career, or technical school. The U.S. Department of Education offers eligible students at participating schools Direct Subsidized Loans. The annual borrowing limit for these loans varies depending on the year of study and whether the student is a dependent or independent. For dependent students in their first year, the limit is $5,500, with no more than $3,500 of this amount in subsidized loans. For independent students in their first year, the limit is $9,500, with no more than $3,500 of this amount in subsidized loans. These limits gradually increase in the subsequent years of study.

Direct Unsubsidized Loans are available to undergraduate and graduate students; there is no requirement to demonstrate financial need. The annual borrowing limit for these loans also varies depending on the year of study and dependency status. The limit for dependent students in their first year is $5,500, minus any subsidized funds received. The limit for independent students in their first year is $9,500, minus any subsidized funds received. These limits also increase in the subsequent years of study.

Reason 1: No Credit Check or Cosigner for Federal Student Loans

One of the main advantages of federal student loans, including Direct Subsidized and Unsubsidized Loans, is that they do not require a credit check or a cosigner. This is a significant benefit for students who are just starting out and may not have established a credit history yet.

When students apply for a federal student loan, their credit history is not considered. This means that even if your child has no credit history or a low credit score, they can still qualify for a federal student loan. This is not the case with many private student loans, which often require a credit check and may require a cosigner if the student does not have a sufficient credit history.

In addition, federal student loans do not require a cosigner. A cosigner is a person who agrees to repay a loan if the borrower cannot make the payments. While having a cosigner can help a student qualify for a private loan or get a lower interest rate, it also puts the cosigner at financial risk. If the student cannot make the payments, the cosigner is responsible for repaying the loan.

On the other hand, Parent PLUS Loans are credit-based, meaning your credit will be checked and could be impacted. If you have an adverse credit history, you may be required to apply with an endorser (similar to a cosigner) or provide documentation to the U.S. Department of Education explaining your adverse credit history. This can be more complex and time-consuming than the straightforward application for federal student loans.

Subsidized vs. Unsubsidized Loans: What’s the Difference?

Direct Subsidized Loans are available only to undergraduate students with financial need. The school determines the amount you can borrow, which may not exceed your financial need. The U.S. Department of Education pays the interest on a Direct Subsidized Loan while you’re in school at least half-time, for the first six months after you leave school (referred to as a grace period), and during periods of deferment.

In contrast, borrowers of Parent PLUS Loans and Direct Unsubsidized Loans are responsible for all the interest that accrues on the loan, from the date of disbursement until the loan is paid in full. This includes while the student is in school, during the grace period, and during any deferment or forbearance periods. This can significantly increase the overall cost of the loan, making it a more expensive option in the long run.

By borrowing Direct Subsidized Loans rather than an unsubsidized option, your family can save thousands of dollars in interest charges, making it a more cost-effective way to finance the costs of higher education.

Parent PLUS Loans Have Fewer Repayment Plan Options

Federal student loans taken out by a borrower for their own education offer a variety of repayment plans, including income-driven repayment plans that can make monthly payments more manageable after graduation. These plans base the monthly loan payment on the borrower’s income, family size, and state of residence. There are four types of income-driven repayment plans: Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR). These plans can significantly reduce the monthly loan payment, and after a certain period of time (usually 20-25 years), any remaining loan balance is forgiven.

Parent PLUS Loans, however, do not offer as many repayment options. They are not eligible for most income-driven repayment plans, except for the Income-Contingent Repayment (ICR) plan. However, to access the ICR plan, Parent PLUS Loans must be consolidated into a Direct Consolidation Loan. The ICR plan calculates payments based on 20% of your discretionary income or what you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income, whichever is less. The loan balance is forgiven after 25 years of qualifying payments.

In addition to the ICR plan, Parent PLUS Loans are eligible for the Standard, Graduated, and Extended Repayment Plans. The Standard Repayment Plan has a fixed monthly payment over 10 years. The Graduated Repayment Plan starts with lower payments that increase every two years over a 10-year period. The Extended Repayment Plan offers fixed or graduated payments over 25 years.

Though these options provide some flexibility, they do not offer the same level of affordability and potential for loan forgiveness as the income-driven repayment plans available for federal student loans a student takes out for their own education.

Parent PLUS Loans Have Higher Interest Rates

Interest rates are another important factor to consider. Parent PLUS Loans typically have higher interest rates than a student’s federal student loans. This means that over the life of the loan, you could end up paying significantly more in interest with a Parent PLUS Loan compared to a federal student loan taken out by a student.

To illustrate this point, let’s look at some historical interest rates. According to data from, the interest rate for Parent PLUS Loans for the 2020-2021 academic year was 5.30%, while the interest rate for Direct Subsidized and Unsubsidized Loans for undergraduate students was significantly lower at 2.75%.

This difference in interest rates can result in a substantial difference in the total amount repaid over the life of the loan. For example, a $10,000 loan at a 5.30% interest rate repaid over 10 years would result in approximately $3,000 in interest payments. The same loan amount at a 2.75% interest rate would result in approximately $1,500 in interest payments. That’s a difference of $1,500, simply due to the interest rate.

Legal Responsibility

Finally, it’s important to consider who is legally responsible for repaying the loan. With a Parent PLUS Loan, it’s the parent’s legal responsibility to repay the loan. You may agree with your child that they will repay the loan, but if they don’t, it’s your responsibility. With federal student loans, the responsibility lies with the student, which can provide an important lesson in financial responsibility.

Making the Right Choice

Parent PLUS Loans can be a useful tool to help finance your child’s education, but they should not be the first choice. Federal student loans offer a number of advantages, including no credit check or cosigner, the possibility of subsidized interest, more repayment options, lower interest rates, and teaching your child financial responsibility. If federal student loans do not cover the full cost of attendance, then consider supplementing with Parent PLUS Loans if necessary.

Remember, every family’s situation is unique. It’s important to research all your options and consult with a financial advisor or college financial aid office to make the best decision for your family.

So, start with your child taking out their own federal loans. It’s a decision that could save you money and stress in the long run.


Meet Jay

Since I became a lawyer in 1995, I’ve represented people with problems involving student loans, consumer debts, mortgage foreclosures, collection abuse, and credit reports. Instead of gatekeeping my knowledge, I make as much of it available at no cost as possible on this site and my other social channels. I wrote every word on this site.

I’ve helped thousands of federal and private student loan borrowers lower their payments, negotiate settlements, get out of default and qualify for loan forgiveness programs. My practice includes defending student loan lawsuits filed by companies such as Navient and National Collegiate Student Loan Trust. In addition, I’ve represented thousands of individuals and families in Chapter 7 and Chapter 13 bankruptcy cases. I currently focus my law practice solely on student loan issues.

I played a central role in developing the Student Loan Law Workshop, where I helped to train over 350 lawyers on how to help people with student loan problems. I’ve spoken at events held by the National Association of Consumer Bankruptcy Attorneys, National Association of Consumer Advocates, and bar associations around the country. National news outlets regularly look to me for my insights on student loans and consumer debt issues.

I’m licensed to practice law in New York and California and advise federal student loan borrowers nationwide.

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