Parent PLUS loans stand out as a suitable alternative to private student loans, providing additional flexibility in repayment. However, it’s important to note that Parent PLUS loans tend to be more expensive than choices. Consequently, its default is severe, resulting in a significant wage and Social Security garnishment.
A parent PLUS loan assists in covering financial gaps left by your child’s financial aid package. Typically, these loans from the government feature fixed interest rates, providing flexibility in repayment and chances for potential student loan forgiveness.
What Is a Parent PLUS Loan?
The Direct PLUS loan is under the category of the federal student loan program, and one type is the Parent PLUS loan. This Parent PLUS loan is designed for parents or legal guardians of tertiary students, aiming to assist in covering educational expenses.
Additionally, parents can request any loan amount up to the annual expenses of their child’s attendance, subtracting any financial aid without restricting the amount borrowed.
However, while the limitless loan for borrowing may appear attractive, it comes with the potential for heavy parent debt. Lastly, PLUS loans are not designed for grandparents unless they serve as the legal guardians of the student grandchild.
Moreover, it’s crucial to carefully consider the advantages and disadvantages of choosing a parent PLUS loan before applying. Depending on your specific circumstances, a private parent loan could potentially become a more suitable choice.
How Does It Work?
Parent PLUS loans come with a set interest rate, and borrowers are required to cover an origination fee per loan. In addition, Parent PLUS loans are not subsidized loans, making the interest increase even if the loan is suspended. Furthermore, it offers the advantage of not requiring a strong credit history, making it an attractive choice for individuals with low credit ratings. However, a credit history including recent bankruptcies or loan defaults within the past five years could be a hurdle.
In such cases, applying with a creditworthy endorser, similar to a student loan cosigner, may be necessary. The fixed interest rate on parent PLUS loans remains consistent throughout the loan term, aiding in budget planning. Moreover, there’s an origination fee associated with PLUS loans, which contributes to the overall borrowing costs. Additionally, PLUS loan repayments commence immediately unless a deferment or forbearance is sought.
Also, borrowers have various repayment options to explore for achieving a lower monthly payment or an extended term. While PLUS loans are generally only eligible for Income-Contingent Repayment (ICR) after consolidation, this can provide flexibility. Furthermore, certain occupations and criteria might render your PLUS loan eligible for student loan forgiveness, presenting a significant potential benefit.
How Much is the Parent PLUS Loan Interest Rate?
The Parent PLUS loan interest rate range of 7.54% tends to be higher compared to private student loan rates and alternative financing options. For instance, homeowners who are parents could secure a cash-out refinance mortgage at a potentially lower rate.
It’s important to note that it is associated with an origination fee, currently set at 4.228%, which is reduced before the loan amount is paid. This simply means $422.80 is reduced for every $10,000 borrowed. Interest is calculated on the entire borrowed amount before factoring in the fee.
Additionally, the interest rates may be higher compared to federal student loans, which typically have a set limit annually for an undergraduate degree. In addition, Parent PLUS Loans are restricted by the overall cost of attendance, aside from any additional financial aid received.
How much Can I Borrow?
To determine the maximum borrowing limit per academic year, you subtract other financial aid from your total cost of attendance. For a PLUS or Grad PLUS loan to undergo processing, the eligibility and requested loan amount for direct loans must exceed $350.
Parent PLUS Loan Eligibility Requirements
These eligibility requirements are grouped into two types, such as parent and student eligibility. Under the parent’s eligibility, parents must be the biological or adoptive parent of a dependent undergraduate student enrolled at least half-time.
In addition, applicants must be a U.S. citizen or an eligible non-citizen. Generally, parents need to meet minimal credit standards, while the student must fulfill general eligibility criteria for financial aid.
Lastly, grandparents and legal guardians are ineligible unless they legally adopt the student. However, under student eligibility, the student must also be a U.S. citizen or eligible non-citizen and should not have an unresolved previous student loan. In addition, male students must be between the ages of 18 and 25 and must register for the Selective Service System.
How To Apply for Parent PLUS Loans
Ensure your student fills out the FAFSA form.
Before seeking a parent PLUS loan, your child needs to complete the Free Application for Federal Student Aid (FAFSA). The FAFSA becomes available annually on October 1, though there’s a delay until December for the 2024–25 school years.
If your child is eligible for financial assistance, they can explore various affordable funding choices, including subsidized and unsubsidized student loans, Pell Grants, and work-study opportunities.
Explore all available scholarship and grant opportunities.
Take the time to assist your child in researching college scholarships that align with their qualifications. Although applying for scholarships requires a substantial time commitment, the payoff of securing free college funding is well worth the effort.
Determine the remaining financial Gaps
After your child has explored all available financial aid avenues, including scholarships and grants, it’s time to calculate the additional funds required to meet basic expenses.
Remember that a school’s estimated cost of attendance might surpass the actual amount your child needs. Your child can refine their budget by opting for secondhand books, considering living at home and avoiding costly meals out.
Submit a Parent PLUS Loan Application
Locate the online parent PLUS loan application form on StudentAid.gov. If you have any inquiries or need assistance, reach out to your child’s school financial aid office for guidance.
Choose your repayment option
Parent PLUS loans typically default on the 10-year standard repayment plan, offering a quicker path to settling your student debt. However, if you prefer a reduced monthly payment or an extended repayment period, consider the following alternatives:
- Graduated Repayment Plan: Begin with modest payments that gradually increase over 10 years.
- Extended Repayment Plan: Make fixed or graduated payments spread over 25 years.
- Income-Contingent Repayment (ICR) Plan: If you consolidate your PLUS loans, pay 20% of your discretionary income or the amount equivalent to a 12-year plan, whichever is lower. Any remaining balance after 25 years could qualify for student loan forgiveness.
Is Parent PLUS Loans Right for Me?
Parent PLUS loans, like any form of borrowing, require careful consideration. Before you begin application procedures, funding sources are exhausted, and assistance is an alternative.
Typically, this places responsibility for the debt on your child, safeguarding your retirement and potentially leading to cost savings. In addition, students offer loans with minimal interest rates directly to federal students, which is significant.
These rates for undergraduate direct-subsidized and direct-unsubsidized loans are currently set at 4.99%. Lastly, students typically have more working years ahead of them compared to their parents.
Alternatives To Parent PLUS Loans
Although parent PLUS loans offer several advantages, they may not align perfectly with your family’s requirements. It’s best to explore private parent loans, as they might offer more favorable interest rates compared to parent PLUS loans.
However, private loans often lack the benefits provided by federal loans, such as flexible repayment plans and options for student loan forgiveness.
As an alternative to borrowing, consider assisting your child in researching full-ride scholarships or encouraging them to apply to colleges that don’t require student loans. This approach can potentially alleviate the need for borrowing altogether.
The Federal Direct Parent PLUS Loan is an educational loan based on credit accessible to parents of dependent undergraduates directly through the U.S. Department of Education at participating schools.