What is a PLUS loan?
A PLUS loan, also known as a direct PLUS loan, is a federal loan for higher education available to parents of college students, as well as graduate or professional students. PLUS stands for Parent Loan for Undergraduate Students. Like federal student loans, PLUS loans are offered through the US Department of Education’s William D. Ford Federal Direct Loan Program. The government itself is the lender, hence the name “direct loans.” “.
- PLUS loans are federal loans for parents of college students, as well as graduate and professional students.
- A PLUS loan allows you to borrow up to the full cost of college, less any other financial aid.
- Like federal student loans, PLUS loans offer a variety of flexible repayment plans.
Understanding PLUS loans
In order for their parents to be eligible for a PLUS loan, students must be enrolled at least half-time in a school that participates in the Federal Direct Loan Program.
The money from the PLUS loan goes first to the educational institution, which applies it to expenses that include tuition, room and board, fees, etc. The remaining funds are disbursed directly to the parent or student.
PLUS loans have a fixed interest rate for their entire term. For example, loans disbursed after July 1, 2019 and before July 1, 2020 have an interest rate of 7.08%.
On March 13, 2020, President Trump indefinitely suspended student loan interest from federal agencies during the 2020 economic crisis.
How to qualify for a PLUS loan
To apply for a PLUS loan, students and their parents must complete the Free Application for Federal Student Aid (FAFSA). The parent must also pass a standard credit check. Students working toward a graduate or professional degree at an eligible school can also apply for PLUS loans on their own behalf. These loans are often called a graduate PLUS loan, as opposed to a parent PLUS loan.
For a parent PLUS loan, the student must be a dependent of the parent (biological or adoptive) or, in some cases, stepparent or grandparent. Both parents and students must meet the general eligibility requirements for student aid, such as being a US citizen or permanent resident alien, and the parent must not have an adverse credit history. If they do, they may still qualify if they can obtain an endorser for the loan, or indicate extenuating circumstances for their poor credit rating. When parents cannot qualify for a PLUS loan, their children may be eligible for student loans with higher limits.
Grad PLUS loans have the same eligibility requirements, except they apply only to the student.
Pros and cons of PLUS loans
There are several important benefits to obtaining a PLUS loan. First, the parent can borrow the full amount the student needs for their college education, less any other financial aid they receive. This includes tuition, room and board, fees, books, and other related expenses. Also, the borrower does not have to demonstrate financial need to be eligible for the loan.
Plus, PLUS loans have fixed interest rates. The rate remains the same for the life of the loan until it is paid in full. Therefore, there is no threat of higher interest charges, even when market rates go up. PLUS loan rates are relatively low, but not as low as student loan rates.
Parents can borrow the full amount needed for the student’s education.
Borrowers are eligible for a PLUS loan regardless of financial need.
PLUS loans have relatively low fixed interest rates.
Parents generally must pass a credit check to be eligible for a PLUS loan.
The government charges a loan fee, which is deducted from each disbursement it receives.
Parents are permanently responsible for repaying the loan. They cannot transfer it to the child.
One of the possible downsides to relying on PLUS loans is that parents are subject to a credit check. Although you won’t necessarily need excellent credit to be approved, your credit file must be fairly clean if you want to qualify. Those with bad credit can still qualify if they have someone to guarantee the loan.
Another drawback of PLUS loans is that the government charges a fee, which is deducted from each disbursement and reduces the amount of money you actually receive. The rate for advance loans from October 1, 2019 and before October 1, 2020 is 4.236%.This means that the fees for a $ 25,000 loan would total $ 1,059. When it is time to pay off the loan, you must repay the full amount you borrowed, including those fees.
Finally, parents are permanently responsible for repaying the PLUS loan. They cannot transfer it to their child, even if the child has the means to repay it. Also, unlike a Sallie Mae loan, parents will not be able to get their loan balance forgiven if their child faces permanent total disability (TPD).
By requesting a deferment, you can postpone paying your PLUS loan until the student graduates.
PLUS loan repayment
Payment on a PLUS loan should generally begin once the entire loan has been disbursed. You can start paying off your loans while the student is still in school or request a deferral. With a deferral, you will not have to make payments while the student is enrolled at least half-time or for an additional six months after the student graduates, leaves school, or drops below half-time enrollment. However, interest will continue to accrue during that time and will be added to the loan balance.
The Department of Education offers several PLUS loan repayment plans for parents, including:
- Standard payment plan. With this plan, you make fixed monthly payments for up to 10 years. If you consolidate more than one Parent Plus loan, you can extend the repayment period up to 30 years.
- Gradual amortization plan. In this plan, you will also pay off your loan over a period of up to 10 years. But instead of being fixed, your payments will start low and then increase every two years.
- Extended payment plan. Available to borrowers who owe more than $ 30,000 in direct loans, this plan allows you to pay off your loans over 25 years, with either fixed or gradual payments.
For graduate PLUS loans, borrowers may have additional options, including income-based repayment plans that base their monthly payment on income and family size. Generally, PLUS graduate borrowers have 10 to 25 years to repay their loans, depending on the repayment plan they choose.