The Scoop on Parent PLUS Loans
College is expensive, and sometimes, even with scholarships, grants, and federal student loans, there’s still a funding gap. That’s where Parent PLUS Loans come in. Think of them as a helping hand from Uncle Sam, specifically for parents who want to help their kids pay for school.
How Did We Get Here? A Little Background
Parent PLUS Loans are part of the Direct Loan Program, which is managed by the U.S. Department of Education. They were created to provide an additional source of funding for higher education, allowing parents to borrow directly from the federal government.
How Does a Parent PLUS Loan Work?
Here’s the breakdown:
- Who can borrow: U.S. citizens or permanent residents who are the parent (or stepparent) of a dependent undergraduate student enrolled at least half-time in an eligible program at a college or university. The student must also be eligible for federal student aid.
- What they cover: Parent PLUS Loans can cover the full cost of attendance, minus any financial aid the student already receives. This includes tuition, fees, room and board, books, supplies, and even transportation.
- Borrowing limits: There’s no annual limit other than the cost of attendance. You can borrow up to 100% of your child’s educational costs, minus aid received.
- Credit Check: While not a credit-based loan in the traditional sense, the U.S. Department of Education does perform a credit check to ensure the borrower doesn’t have adverse credit history, such as accounts that are 90 days or more delinquent. It’s not a hard inquiry that impacts your credit score.
- Interest Rate: Parent PLUS Loans have a fixed interest rate, which is set annually by Congress. These rates are typically higher than those for Direct Subsidized and Unsubsidized Loans. (You can find the current rates on the Federal Student Aid website.)
- Fees: There’s also an origination fee, a percentage of the loan amount deducted upfront. This fee helps the government cover the costs of administering the loan program.
- Repayment: Repayment usually begins 60 days after the loan is fully disbursed. Parents can choose from several repayment plans, including the standard repayment plan, graduated repayment plan, and extended repayment plan. They may also be eligible for income-contingent repayment or income-driven repayment plans, which can help lower monthly payments based on income.
Real-World Example: The Smiths’ College Fund
The Smiths’ son, Alex, is heading off to a four-year university. Alex received a federal Pell Grant and a federal Direct Subsidized Loan, but there’s still $15,000 left to pay for his junior year. Mr. and Mrs. Smith decide to take out a Parent PLUS Loan to cover the remaining costs. They borrow the $15,000, and the loan accrues interest from the time it’s disbursed until it’s paid off. Their monthly payments will be calculated based on the loan amount, interest rate, and chosen repayment plan.
Who is Affected by Parent PLUS Loans?
- Parents: They are legally responsible for repaying the loan.
- Students: While the student doesn’t borrow the loan directly, the loan helps them finance their education without taking out private loans or working excessive hours.
- The U.S. Department of Education: Manages the loan program and collects payments.
Tips and Strategies for Parent PLUS Loans
- Borrow only what you need: Just because you can borrow the full cost of attendance doesn’t mean you should. Carefully calculate your needs to minimize debt.
- Understand the interest rate and fees: These can significantly increase the total amount you repay. Compare them to other loan options, including private loans, but be aware of the protections offered by federal loans.
- Explore repayment options: If monthly payments seem daunting, look into income-driven repayment (IDR) plans. These plans cap your payments based on your income and family size, and any remaining balance may be forgiven after 20-25 years of payments.
- Consider a cosigner for private loans: If you’re looking at private loans, a strong credit score or a creditworthy cosigner can help you secure better terms. Parent PLUS loans don’t require a cosigner, but they do have that credit check.
- Borrowing for graduate school: Parents can also take out PLUS loans for their dependent graduate or professional student children, though the terms may differ slightly.
Common Misconceptions
- “It’s a free government handout.” No, Parent PLUS Loans are loans that must be repaid with interest.
- “My credit score won’t be affected.” While the credit check for a PLUS loan isn’t a hard inquiry, if you default on the loan, it can negatively impact your credit. Also, taking on significant debt can affect your ability to borrow in the future.
- “The student is responsible for repayment.” The parent is legally responsible for repaying a Parent PLUS Loan, not the student.
Sources:
- Federal Student Aid: PLUS Loans – https://studentaid.gov/understand-aid/types-of-aid/loans/plus
- Navigating Repayment Options for Federal PLUS Loans – https://www.consumerfinance.gov/about-us/blog/navigating-repayment-options-federal-plus-loans/