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Paying for college is a challenge, and rising tuition costs certainly don’t help. According to College Board, the average cost of a four-year private college has increased by more than $3,000 over the last five years. Scholarships, grants and work-study programs can help bridge the gap, but it’s best to have a robust savings to back you up. Since some parents don’t want their child to take on too many loans themselves, the federal government created Parent PLUS loans. They stand out from other programs thanks to a fixed interest rate and flexible repayment options. Here we discuss what exactly a Parent PLUS loan is, how it works and whether you should get one.
Parent PLUS Loans Defined
Let’s start with the basics. A Parent PLUS loan is a federal student loan offered by the U.S. Department of Education Direct Loan program. Unlike other Direct Loans and most student loans in general, Parent PLUS loans are issued to parents rather than students. Also eligible for issue are stepparents, dependent graduate students and other relatives.
Whoever takes out the loan holds the sole legal responsibility for repayments, regardless of personal arrangements. This is very different than a parent cosigning his or her child’s student loan. The maximum PLUS loan amount is the cost of attendance minus any other financial aid received, which could equal tens of thousands of dollars per year. For PLUS loans distributed between July 2018 and July 2019, the interest rate is 7.60%. As such, the decision to get a Parent PLUS loan should not be taken lightly.
Who Should Get a Parent PLUS Loan?
According to the Office of Federal Student Aid, about 3.5 million parents and students have borrowed a collective $83.9 billion using Parent PLUS Loans from the federal government. To qualify for a Parent PLUS loan, you must be the parent of a dependent undergraduate student, dependent graduate student or professional student enrolled at least half-time in a participating college or university.
You and your child must also meet the general eligibility rules for federal student aid, such as proving U.S. citizenship and demonstrating need. Male students must be registered with the Selective Service. As with other Direct PLUS loans, you usually can’t secure a Parent PLUS loan if you have an adverse credit history. The Department of Education won’t approve a borrower with charged-off accounts, accounts in collections or a 90-day delinquent account with a balance of $2,085 or more.
You shouldn’t apply for a Parent PLUS loan just because you qualify. In fact, it’s usually best if a student gets all of the Direct Loans he or she is eligible for first. These loans tend to have lower interest rates and fees. A parent could always help his or her child with student loan repayments, anyway.
You should really only apply for a Parent PLUS loan if your child needs more financial aid than he or she has received from other sources. It’s also important that both students and parents are on the same page about expectations and repayment plans.
Pros of Parent PLUS Loans
Flexible Loan Limits
Identified generally as “cost of attendance minus any other financial aid received,” Parent PLUS loans can be used toward tuition and fees, room and board, books, supplies, equipment, transportation and miscellaneous personal expenses. They do not have the same limits imposed on them as other federal student loans do. This makes Parent PLUS loans a great supplement if you have a mediocre financial aid package. Of course, you should still be cautious not to take on debt you won’t be able to pay back. Our student loan calculator can help you decide how much you should borrow.
Fixed Interest Rate
As with other federal student loans, the interest rate on a Parent PLUS loan stays the same throughout the life of the loan. It won’t alter based on national interest rates, the prime rate or other factors. Every July, the Department of Education sets the Parent PLUS loan interest rate based on that year’s 10-year treasury note. The fixed interest rate makes it easy for borrowers to predict expenses, make both short- and long-term financial goals and set a budget.
Multiple Repayment Options
Parent PLUS loans are eligible for several different repayment plans, one of which should work for you. This flexibility makes them one of the most accommodating programs for funding a college education. Check out your choices below:
- Standard Repayment Plan: The most common option, which allows for fixed monthly payments for 10 years.
- Graduated Repayment Plan: This starts with small payments that gradually increase over 10 years. In theory, this should coincide with growing income levels.
- Extended Repayment Plan: This provides fixed or graduated payments over 25 years, as opposed to 10.
- Income-Contingent Repayment: Borrowers pay 20% of their discretionary income or what they’d pay on a 12-year plan, whichever is lower. They also qualify for student loan forgiveness if they still have a balance after 25 years.
Cons of Parent PLUS Loans
Loan Origination Fee
Interest isn’t the only expense you’ll encounter with Parent PLUS loans. There’s also a loan origination fee. The fee amount is a percentage of the loan, and it varies depending on the disbursement date of the loan. For loans after October 1, 2018 but before October 1, 2019, the fee is 4.248% of the loan amount. That means that if you borrow $30,000 using a Parent PLUS loan, you’d pay a fee of $1,274.40.
This fee is proportionately deducted from each loan disbursement, which essentially reduces the amount of money borrowers have to cover education-related costs. Since many private student loans don’t have a fee, it’s worth looking into private options to determine which loan has the lowest borrowing costs.
Relatively High Interest Rate
Currently set at 7.60%, Parent PLUS loans certainly don’t have the lowest rate out there. If you have strong credit and qualify for a better rate, you might consider a different loan that will cost less in the long run. Direct Subsidized Loans currently carry a 5.05% interest rate, while Direct Unsubsidized Loans are at 6.60%. On the other hand, some private lenders have interest rates as low as 2.795%.
Limited Grace Period
Parent PLUS loan repayment normally begins within 60 days of loan disbursement, but borrowers have the option to defer repayment. This will last while their child is still in school and for six months after he or she graduates or if the student drops below a half-time enrollment status. Not only is this much less time than borrowers of other loan programs receive, but interest will also continue to accrue during the deferment period.
How to Apply for a Parent PLUS Loan
If a Parent PLUS loan seems right for you, file the Free Application for Federal Student Aid (FAFSA) at FASFA.ed.gov. Depending on the school’s application process, you will request the loan from StudentLoans.gov or the school’s financial aid office.
If you receive approval for a Parent PLUS loan, you will get a Direct PLUS Loan Master Promissory Note (MPN). You’ll have to review and sign the MPN before sending back. Funds are typically sent straight to the school, but you or your child may receive a check. All of the money must be used for educational and college-related purposes.
Tips for Your College Finances
- Every state in the country offers one of more higher education tuition assistance programs called 529 plans. For many prospective college students and their families, this may be one of the best ways to overcome the incredibly high costs of a university degree. What’s better yet is that you can get a plan from any state, not just the one you reside in.
- It’s extremely common for financial advisors to have some level of background knowledge in funding for higher education. The SmartAsset financial advisor matching tool can pair you up with as many as three such advisors in your area.
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