Parent PLUS Loan: 7 Key Things Every Parent Should Know
Got a kid heading off to college this fall? With that first tuition payment staring you down, it’s time to make sure the finances are in place.
Over the last two decades, the average cost of tuition at a four-year private institution in the U.S. has more than doubled. With the price of admittance for both private and public institutions rising every year, it’s no wonder more and more parents are looking at parent student loans to help their children pay for college.
One popular choice is the Parent PLUS loan, a federally funded loan available through the U.S Department of Education’s Direct Loan program. Parent PLUS loans are a great option for many families, but they’re not suitable for every situation and you do have to meet certain requirements to qualify.
Before you fill out a Parent PLUS loan application, take a look at our list of seven essential things every parent should know.
1. The parent - not the student - is on the hook.
The main aspect of a Parent PLUS loan that distinguishes it from other types of college loans is that a parent or legal guardian takes out the loan and is responsible for repayment. In other words, this is a loan to the parent, not the student.
Once you’ve taken out a Parent PLUS loan, the onus is on you to repay it even if your child doesn’t finish college or is unable to find a job after graduation. Parent PLUS loans are non-transferrable and require payment to begin immediately after disbursement.
2. You can borrow as much as you need.
These loans also differ from other student loans in that there are no limits to how much you can borrow.
“Unlike some types of federal student loans which limit how much you can borrow each year, or aggregate, parent PLUS loans don’t have a preset limit,” says personal finance writer Louis DiNicola. “However, you’re still limited to the school-determined cost of attendance for the student, minus other financial aid that the student received.”
The absence of a cap on borrowing limits can be attractive at the outset, but beware: it can get you into trouble if you borrow more than you can afford.
3. They’re more expensive than other options.
The interest rate for a Parent PLUS loan is usually higher than that of a private student loan. However, the interest rate is fixed and will remain that way throughout the life of your loan, which means you won’t have to worry about your interest rate fluctuating with the market. For the 2018-2019 school year, the interest rate for a Parent PLUS loan is 7.6% (the rate will change July 2019).
Parent PLUS loans also come with an origination fee, which is deducted from your loan just before it’s disbursed (i.e., just before it’s paid out). That means that the amount you receive will be less than the amount you borrow.
Currently, the origination fee for a Parent PLUS loan is 4.248%. As an example, if you borrow $20,000, $849.60 would be deducted from your loan amount before that amount is disbursed. If you have an idea of how much you’d like to borrow, you can use a Parent PLUS loan calculator to get an estimate for your monthly payments.
4. You must meet the eligibility criteria.
Here are the standard requirements for a Parent PLUS loan:
- You must be the biological or adoptive parent, legal guardian, or stepparent (if you’re married to the child’s custodial parent) of the child
- You must fill at the FAFSA (Free Application for Federal Student Aid)
- Your child must be enrolled in college and have at least a half-time course load
- You must submit to a credit check
- You can’t have an adverse credit history
- You can’t be in default on any loans, including federal student loans
- Although the majority of applicants will need to meet the above qualifications to be eligible, there are a few notable exceptions.
For example, if you don’t qualify because of an adverse credit history, you have the option of adding an endorser (cosigner) to the account who agrees to pay the debt if you default. You may also qualify for a Parent PLUS loan if you can show you have certain extenuating circumstances, such as a divorce decree proving you’re not responsible for the debt.
5. Getting denied can be a good thing.
Even if you’re certain you won’t meet the credit requirements, you might still consider applying for a Parent PLUS loan. Why? Because federal student loan limits are actually higher for students whose parents have been denied the loan. Ironically, if you are denied a Parent PLUS loan, it could trigger greater access to federal student loans for your child.
6. The repayment options are flexible.
One key advantage of Parent PLUS loans is that they offer several repayment options:
- Standard plan—You’ll pay a fixed amount every month for up to 10 years.
- Graduated plan—You’ll start with a lower payment that will gradually increase, typically every two years, until the loan is repaid (you have 10 years to pay it off.)
- Extended plan—You’ll pay the loan over an extended period of time—in fixed or graduated payments—for up to 25 years. Your monthly payments will be lower with this plan, but you must owe more than $30,000 to be eligible.
- Income Contingent Repayment (ICR) Plan—You’ll pay your loan via a plan that limits your payments to either 20 percent of your discretionary income or the amount you’d pay with fixed monthly payments on a 12-year plan—whichever is lower. To be eligible for this plan, you must consolidate your Parent PLUS loan into a federal direct consolidation loan. With the ICR plan, any amount of the loan you still owe will be forgiven after 25 years.
You may also want to find if you qualify for Public Service Loan Forgiveness. With the ICR plan, applicants for this option must be employed full-time in an eligible federal, state, or local public service or nonprofit job and have already made 120 qualifying loan payments while employed. Be advised that Public Service Loan Forgiveness is difficult to qualify for, so make sure you meet all the requirements before you apply.
- Forbearance and deferment—If you’re having difficulty making your Parent PLUS loan payments due to certain situations such as unemployment, economic hardship, or active duty military service, you can apply for deferment or forbearance, both of which allow you to postpone your payments temporarily. With deferment, your payments are postponed in six-month intervals for up to three years. If you don’t qualify for deferment, you may qualify for forbearance, which allows you to discontinue or reduce the amount of your payments for up to 12 months. However, in both cases you will continue to accrue interest on the loan.
7. They shouldn’t be your first resort.
Before taking out a Parent PLUS loan, it’s important to make sure your personal finances are in order, namely that you’re saving for retirement and have little-to-no high-interest debt. You should also ensure that your child has exhausted all other funding options before you apply, including financial aid, scholarships, and grants.
In general, Parent PLUS loans are most beneficial when there’s still a gap in funding that needs to be covered once all other options have been explored.
Parent PLUS Loans: Pros & Cons
As with any type of loan, it’s essential to do your due diligence and make sure it’s the right loan for your unique situation. For some, the pros will outweigh the cons; for others, the reverse is true.
If you’ve maxed out all other funding options and you’re confident that you’re saving enough for retirement, a Parent PLUS loan may be just the right choice to fill the gaps in funding your child’s higher education. They’re relatively easy to qualify for, you’ll never have to worry about fluctuating interest rates, and with multiple repayment options available, you’re bound to find one that’s best suited to your needs.
On the other hand, Parent PLUS loans have an origination fee and higher interest rates than many private parent loans, so the latter option is a far better deal for many parents—especially those with a strong credit score and a healthy credit history.
“If student loan payments prevent fully investing in 401(k) funds and other retirement vehicles, they could have a negative long-term impact on family finances,” says freelance writer Jim Akin, who specializes in consumer finance. “If that's a concern, it'd be wise to consult with a financial expert to help determine the wisdom of taking out a parent student loan.”
So before you apply for a Parent PLUS loan, make sure to explore other ways to pay for college, research other loan types (both private and federal), carefully analyze your income and investments, and make sure your child has applied for all applicable forms of financial aid. Choosing to take on debt for your child’s education isn’t a decision any parent should take lightly. A wise choice now will help both you and your child avoid financial hardship in the years to come.