Some banks, credit unions, specialized lenders, state agencies, or colleges offer Private Parent Loans for parents who want to borrow to help pay for their undergraduate kid’s college costs.  Typically, parents of dependent undergraduates can borrow up to the cost of attendance minus all other forms of financial aid, although some lenders may have annual loan limits.  If you are considering this college financing option,  ensure you know these basics to be an informed borrower.

1. Credit Checks are Required

Just like when you apply to borrow a car or house, Private Parent Loan lenders will look at your credit score and may consider your debt-to-income (DTI) ratio. The credit score will be used to determine your eligibility for the loan and your interest rate.  The better the credit score, the lower the interest rate you will be offered.  Although each lender will have their own credit score criteria, typically parents with credit scores less than 670 will struggle to be eligible for a Private Parent Loan.

2. Interest Rate Options 

Lenders offer both variable and fixed interest rate Private Parent Loans.  This means that a borrower may be able to decide if they want a want tied to the current economic conditions or have the dependability of a specific rate for the entire life of the loan.  When the economy is stable, many borrowers like the variable interest rate because these loans are generally cheaper than fixed rates in the short term. However, borrowers should keep in mind that the variable interest rate often resets quarterly (every three months) over the entire in-school and repayment period. Although in spring of 2021, we have seen Private Parent Loans as low as 1.29%, the actual rate for a specific borrower will be determined by the lender based on the credit strength of the borrower.  For borrowers with the credit scores in the upper 600s, this means the interest rate they are offered for a variable or fixed rate Private Parent Loan will be double digit interest rates which may make the Federal Parent PLUS Loan more attractive.

3. No Fees

Unlike the Federal Parent PLUS Loan, typically Private Parent Loans have no loan fees.  This means the amount borrowed will equal the total of all the disbursements made to the college. If a parent borrowed a Private Parent Loan for their kid who is enrolled at a college with a fall and spring semester system, then $5,000 will be disbursed in the fall at the start of school and $5,000 will be disbursed at the beginning of spring semester.

4. Lots of Repayment Lengths

Currently, private lenders offer repayment periods from 5 years to 15 years for Private Parent Loans.  Borrowers can select the loan term that marks the most sense for their budget.  The shorter the term, the larger the monthly repayments but the least financing costs.  Conversely, the longer the repayment term, the smaller the monthly repayments but the higher financing costs.

5.  Limited Repayment Flexibility

Unlike Federal Direct Loans, Private Parent Loans have limited deferment, forbearance and cancellation options.  Different lenders offer different repayment start dates or repayment flexibility.  Some lenders require Private Parent Loan borrowers to begin repayment of interest and principal while the student is enrolled.  Others let parent borrowers defer principal payments and make interest-only payments while their kid is enrolled and into a grace period.  Although some lenders may offer some loan forgiveness if the student dies or becomes permanently and totally disabled, others do not. 

6.  Special Features

Private Parent Loans offer some special features like Sallie Mae’s 4 months of free Chegg Study or Citizen Bank’s Multi-Year Approval.  Many offer a .25% discount for borrowers who enroll and make monthly payments with auto debit and a few offer regular access to your credit scores.