Parent PLUS loans can be a good alternative to private student loans because they offer more flexible repayment options. But Parent PLUS loans can be costlier than other options, and consequences are harsh for default, including the potential for wage and Social Security garnishment. Here’s an overview of this student loan option.
Higher education is a significant investment in a student’s future, but the rising costs of tuition, room, and board, and other expenses can be a financial challenge for many families. To bridge the gap between available financial aid and the actual cost of attendance, the U.S. Department of Education offers a federal loan option known as the Parent PLUS loan.
Understanding the Parent PLUS Loan
The Parent PLUS loan is a federal loan designed to assist parents of dependent undergraduate students in financing their child’s education. Unlike federal student loans that are taken out by students themselves, the Parent PLUS loan is borrowed by parents on behalf of their children. This loan can be a valuable resource for families who want to contribute to their child’s college expenses while providing flexible repayment options.
Key Features of the Parent PLUS Loan
The Parent PLUS loan comes with several features that make it an attractive option for parents:
- Loan Amount: Parents can borrow up to the cost of attendance minus any other financial aid received by the student. This includes tuition, room and board, books, and other educational expenses.
- Fixed Interest Rates: Parent PLUS loans have fixed interest rates set by the government. These rates are the same for all borrowers and remain consistent throughout the life of the loan.
- Credit Check: Parent PLUS loans require a credit check, but the credit criteria are not as stringent as those for private loans. Adverse credit history does not automatically disqualify parents from eligibility.
- Repayment Flexibility: Parents have the option to choose from various repayment plans, including standard repayment, extended repayment, and income-contingent repayment. This flexibility allows parents to select a plan that aligns with their financial situation.
How Do Parent PLUS Loans Work?
Parent PLUS loans have a fixed interest rate, and the borrower pays an origination fee for each loan. Parent PLUS loans are not subsidized, so interest begins to accrue on the outstanding loan balance as soon as funds are disbursed and continue to accrue even if the loan is in deferment.
This is not a loan to the student. As Richard D. Gaudreau, a student loan attorney in New Hampshire, points out, “It is not a co-signed loan.” These credit-based loans are made to the parent alone and are different from private student loans, which a parent might co-sign.
Parent PLUS eligibility requirements
- You must be the biological or adoptive parent of a dependent undergraduate student enrolled at least half-time.
- You must be a U.S. citizen or eligible non-citizen.
- You generally must meet minimal credit standards, and the student must meet general eligibility requirements for financial aid.
- Grandparents and legal guardians aren’t eligible to take out these loans unless they legally adopt the student.
- They must be a U.S. citizen or eligible non-citizen.
- They must not have previous student loan defaults that haven’t been resolved or consolidated into a federal direct loan.
- Male students who are citizens ages 18 to 25 need to register for the Selective Service System.
Parent Plus Loan Application Process | How To Apply
- Start with the FAFSA®
When you fill out the FAFSA®, one of the options offered for funding are Parent PLUS Loans. These loans are meant to supplement school, state, and other federal financial aid offered. One way in which these loans are different from their federal student loan counterparts is that a credit check is performed to determine any late payments and recent defaults in your credit history.
- Apply online and download a promissory note
You can generally apply online. You’ll also need to download and sign a Master Promissory Note (MPN), a legal document in which you promise to repay your loans (and any interest and fees). It also details the loan’s terms. If you have any questions on how to apply or sign the MPN, contact the school’s financial aid office.
- Choose how much you want to borrow
Parent PLUS Loans are awarded for up to the full cost of attendance minus other financial aid a student’s received. Funds are sent directly to the school. Refunds for amounts beyond what is owed to the school are sent to the parent or to the student with the parent’s permission.
After you’ve submitted your application, your information will be sent from the federal government to your student’s school, which will confirm your eligibility and how much you can borrow.
Note: You don’t have to borrow the full amount offered. For instance, you may decide to pay some of the money offered in the form of a Parent PLUS Loan with a combination of installment plans from the college, tax credits, student income, your own income, and/or private student loans.
Credit Requirements For A Parent PLUS Loan
For two years before your credit is pulled: You can’t have an “adverse credit history,” including one or more debts that are more than 90 days overdue that total more than $2,085, or a collection or charge off.footnote1
For five years before your credit is pulled: You can’t have a loan default, a discharge of debts in bankruptcy, foreclosure, repossession, tax lien, wage garnishment, or a write-off of a federal student aid debt.
If you don’t have good credit
If your credit needs improvement, you may still be able to get a Parent PLUS Loan by providing documentation and getting approved because of 1) extenuating circumstances, or 2) adding an endorser.
Extenuating circumstances could be a reason why your credit report doesn’t accurately describe your true ability to repay the loan. Examples include:
- A divorce decree showing you aren’t required to pay the debt.
- Proof you’ve been making payments on a debt in question for at least six months.
- Excessive medical bills that you can document.
No matter what the reason behind the extenuating circumstances, documenting any situation is important. And of course, make sure you are able to show how the situation has improved.
Adding an endorser: An endorser is the federal government’s term for a cosigner, a person who’s willing to be a co-borrower on the loan. This can allow the person whose credit might not be established yet or may not be as good, to borrow the money.
Pros Of Getting An Endorser
- You’ll get the rest of the money needed for your student’s cost of attendance for that school year.
- You’ll have time to improve your credit before borrowing for future years.
If the endorser has excellent credit, you may also be able to have them cosign a private student loan for your student (which may have a lower interest rate). If so, your student could remove the cosigner’s name from the private loan, provided the student meets the rules for cosigner release.
Cons Of Getting An Endorser
- You may not be able to afford the amount you are approved for.
- You’re asking another person to be responsible for the loan in addition to you. However, you can make a decision to prioritize paying off this loan first.
- Having enough income to afford repayment is not a requirement. Whether or not you are approved, especially with an endorser, has nothing to do with affordability.
If you are approved because of extenuating circumstances or because of an endorser, expect to complete PLUS Loan credit counseling. It usually takes 20 to 30 minutes total and must be completed in one sitting.
If you are rejected for Parent PLUS Loans, your student may be eligible for more federal student loans at a lower interest rate. The only difference is it may not be for as much money, and your student could still have to find other methods for filling the remaining financial aid gaps.
Parent PLUS Loan interest rates
While Parent PLUS Loan interest rates are higher than those for federal student loans, consider that the student loans are generally capped for all years of an undergraduate degree (see current limits). Parent PLUS Loans, however, are capped by the total cost of attendance minus other sources of financial aid.
- Parent PLUS Loans are not subsidized by the Department of Education.
- Interest rates and origination fees can change on July 1 each year. That means interest rates and fees could be different each year you borrow. Once issued, the interest rate is fixed and never changes. The only time it does is if you receive the 0.25 percent discount for enrolling in automatic monthly payments.
- Note: Private student loans may have a better interest rate than PLUS Loans if parents have excellent credit, so you should compare them.
Parent PLUS Loans Repayment
One of the biggest perks to Parent PLUS loans is that some of the same repayment plans available on federal student loans also apply for these.
You can’t transfer repayment responsibility of Parent PLUS loans to the student. If the goal is to have the student ultimately be responsible for the debt, consider cosigning a private student loan for them. Most private student loans have a cosigner release where you can be removed after the student makes 12 to 24 on-time payments.
When repayment begins
- Repayment begins 60 days after the final disbursement for that academic year. Disbursements are made based on school terms. (There are no prepayment penalties, so you can start paying back earlier, if you like.)
- You can request deferment for each academic year while your student is enrolled at least half time.
- When the student leaves school, you get a six-month grace period before payments begin. In other words, if a student graduates in May, the first payment on the Parent PLUS Loan would not be due until November.
How interest accrues
- Interest accrues while the student is in school, but parents can choose to pay the interest as they borrow.
Repayment plan options
- Income-contingent repayment plan (requires income verification): The payment can be higher than plans available to students BUT it still allows you to make lower monthly payments if you qualify. To qualify for the income-contingent plan, it’s best to consolidate Parent PLUS loans to one federal direct loan after you finish all borrowing for your student or students.
- A 10-year extended repayment plan or a Parent PLUS consolidation loan (income verification not required): Consolidation means you are combining all of your loans into a single loan. Then, you can potentially choose a repayment plan for up to 30 years to keep payments low. While payments may be lower, keep in mind you’ll actually be paying more over the life of the loan if you extend the term. If you consolidate your loans, you can choose other plans for repayment, such as an income-driven plan.
- Public Service Loan Forgiveness (PSLF): It may be possible to get some Parent PLUS Loans forgiven via the Public Service Loan Forgiveness—partial forgiveness based on working for specific public service employers in specific roles. To get an idea as to whether you could qualify, call the number on the PSLF employer certification form. It’s important to read up on loan forgiveness programs. They are by no means a guarantee!
Remember, you can always repay student loans early without penalty, so it doesn’t hurt to choose a longer, more affordable repayment option and make extra payments. It’s very common for borrowers to send in just a few extra dollars monthly to reduce the balance and the interest charged. Ten dollars per month or more added to your monthly payment can reduce months to years off your total repayment time frame.
If you have trouble making payments
In addition to income-contingent and deferment options, parents can qualify for temporary breaks from payments called forbearance in case of economic difficulty for a variety of reasons. Approval is generally up to the servicer of your loan or loans.
There are also options to consolidate your Parent PLUS Loan with a private company or bank. Only consider offers where the interest rate is lower, you can afford the payment, and if you have zero chance of qualifying for PSLF. And you may lose out on other benefits, so check before you consolidate your loans.
That being said, be wary of advertisements or phone calls that seem too good to be true—like wiping out your debt altogether. Do your homework and only call numbers listed on a reputable lender’s website and perform a web search to make sure it isn’t part of an identity theft scam to gather your personal information.
Considering a Parent PLUS Loan for your student
While a student should generally start with any available federal student loans, there are several reasons why you might choose a Parent PLUS Loan:
- Your student needs more money for school than they can receive from federal student loans.
- You have good credit.
- You’re willing to take on the financial responsibility of a loan rather than have it fall on your student.
- You can take advantage of some of the same benefits (including income-based repayment) as other federal student loans.
If any of these reasons fit your financial preferences, a Parent PLUS Loan might be a good addition to your family’s paying-for-college solution.
Responsible Borrowing Considerations
While the Parent PLUS loan provides an opportunity to support your child’s education, responsible borrowing is essential to ensure both parents and students can manage the debt:
- Assess Affordability: Determine the amount you can comfortably borrow without compromising your own financial stability.
- Open Communication: Have candid conversations with your child about the financial commitment associated with the loan and any expectations for repayment.
- Consider Alternatives: Explore other financial aid options, scholarships, grants, and work-study programs before opting for the Parent PLUS loan.
- Budgeting: Create a budget that includes loan repayment to ensure you can manage the monthly payments alongside other financial obligations.
The Parent PLUS loan offers parents a way to actively contribute to their child’s higher education journey. By providing essential financial support, parents can help their children pursue their academic aspirations and set a strong foundation for their future careers. Responsible borrowing, thoughtful financial planning, and transparent communication between parents and students are crucial for ensuring that the Parent PLUS loan contributes positively to the educational experience without causing undue financial strain.