What Parents Should Know about PLUS Loans
A growing number of families who are faced with high college prices are turning to federal PLUS loans to cover the cost of a bachelor’s degree. At the same time, they are also struggling to repay this debt. Given that most of the attention on college borrowing focuses on student loans, which represents the vast majority of federal college debt, I wanted to take this time to shed more light on the PLUS loan. Below are a few facts that parents should know before signing on the dotted line.
What is a PLUS Loan
The Parent Loan for Undergraduate Students (PLUS) loans enable parents of dependent undergraduate students, who are enrolled at least half-time in an eligible program, to borrow to pay for college costs not covered by financial aid.
How to Apply
Students must first complete and submit the Free Application for Federal Student Aid (FAFSA). The Federal Student Aid office uses the information from the FAFSA to determine your need and eligibility for a PLUS Loan. If you are eligible, you must then complete the Direct PLUS loan application and Master Promissory Note, which describes the terms and conditions for repaying the loan.
As mentioned above, the child must be a dependent undergraduate student. Additionally, parents must meet the following criteria: (1) They must be the biological or adoptive parent of the student (in some cases, the stepparents can also qualify), and (2) They must pass a credit check. You don’t necessarily need excellent credit, but you can’t have an adverse credit history. If parents don’t have an adequate credit history, they may still qualify if they submit a successful appeal for an exceptional circumstance or have an endorser, which acts like a cosigner. There are no income limits.
How Much Can You Borrow
Parents can borrow up to the full cost of attendance of their child’s school minus any financial aid their child was awarded each year. For example, if the cost of attendance is $60,000 and the student receives $30,000 in financial aid, the maximum that the parent can borrow is $30,000.
Although PLUS loans can be a useful financial tool for many parents, they come with both pros and cons, some of which are highlighted below.
PROS OF PLUS LOANS
- Your interest rate will stay fixed over the life of the loan. Once parents borrow the loan, it has a fixed rate that stays the same throughout the life of the loan. The interest rate is set annually for new loans that are made between July 1 of one year and June 30 of the following year. The fixed rate as of July 1, 2020 is 5.30%. Note that these rates are higher than any other type of federal loan. By comparison, the current interest rate for the undergraduate direct student loan is 2.75%, which is why it’s best that the child exhausts their eligibility for student Direct Loans first.
- Forbearance and deferment options are available. PLUS loans have federal protections in the form of a forbearance or a deferment. The forbearance option is available to those who experience an illness or financial hardship, which enables them to skip a few payments, temporarily make smaller payments, or extend the length to repay the loan. A deferment or temporary postponement is available to PLUS loan borrowers of current undergraduate students. However, the interest continues to accrue with both options, which means borrowers will owe more once they commence repayment.
- Flexible repayment plans are available. PLUS loan borrowers qualify for different payment plans. They include the following repayment options: (1) standard (fixed monthly payments over 10 years), (2) graduated (payments start small then gradually increase over 10 years), and (3) extended (pay fixed or graduated payments for up to 25 years). These flexible repayment plans can be a lifesaver for those who lose their job or experience financial hardship.
CONS OF PLUS LOANS
- There is an additional fee for taking out the loan. PLUS loans come with an origination or disbursement fee, on top of the interest. Loans disbursed after October 1, 2020, will be assessed an origination fee of 4.228%. For example, if you borrowed $30,000, you’d pay an origination fee of $1,268.40. This extra fee is a considerable expense when you consider that it’s in addition to the interest you’ll be paying.
- You’re expected to start repayment right away. Along with the origination fee, parents must start making monthly payments within 60 days of full disbursement unless they request a deferment. However, if granted a deferment, it’s important to remember that the interest will continue to accrue.
- Loan repayment cannot be transferred. Parents generally cannot transfer the responsibility of payment to their child, which means that they can be stuck paying for the loan for over 20 years. This can be quite problematic if they hit retirement during repayment, which can make the debt unaffordable. In addition, PLUS loans are rarely discharged.
- High risk. Although PLUS loans can be a useful option for parents looking to help their children pay for college, they generally aren’t the best option for everyone. The loose borrowing limits, higher interest rates, and few options for loan forgiveness make these loans a risky choice for parents.
The average annual amount that parents borrow has increased from $5,200 in 1990 to $16,100 in 2020. This is fairly in-line with college cost inflation, but nearly nine percent of parents entering into repayment now owe more than $100,000! Since parents can borrow enough money to meet the cost of a school’s attendance that isn’t covered by their child’s financial aid, it ultimately makes it easy for them to over-borrow and end up with unmanageable debt. Thus it’s imperative that parents do their research and make sure they know every detail and consider other options before taking out a PLUS Loan. For more information, visit Federal Student Aid website.