When researching student loan options as a parent, you may encounter a parent PLUS loan, also called a direct PLUS loan. Parent PLUS loans are federal Installment loan options available to parents of students seeking a college education. Thinking about a parent PLUS loan but unsure how it works or whether it’s the right option for your child’s education? Continue reading to learn more about the ins and outs of parent PLUS loans.
How Do Parent PLUS Loans Work Exactly?
When families apply for FAFSA, they will see the option for a parent PLUS loan. To be eligible for one of these federal student loans, parent borrowers will need to meet the following requirements:
- You cannot have adverse credit history, although there are some workarounds, which will be explained later. One reason for this requirement is to ensure that the primary borrower can repay their loan.
- You must be the dependent undergraduate student’s biological or adoptive parent (or, in some cases, a step-parent).
- The dependent undergraduate student for whom you are trying to take out a loan for must have at least half-time enrollment at an eligible school.
- The student must be a dependent for the parent who is trying to take out a parent PLUS loan. Keep in mind that many conditions can disqualify a student from being a dependent in a household. For example, if your child gets married, they may not be considered a dependent anymore.
- Your child must meet the general eligibility requirement for federal student aid.
How Much Can I Borrow With a Parent PLUS Loan?
Your maximum loan amount will be determined by the cost of attendance at the student’s school, minus other financial aid they are taking. Every school may be different with tuition and expenses. So, start with them if you want to know about much you need to request when filling out your parent PLUS application.
What Is the Loan Interest Rate I Can Expect?
Unlike private loans, whose interest rates are primarily based on things like debt-to-income ratio, credit utilization, and credit scores, federal student loans don’t work that way. Federal student loans may have the same rate for all borrowers.
With that being said, parent PLUS loans disbursed on or after July 1st, 2022, and before July 1st, 2023, will receive an interest rate of 7.54%. The current origination fee is 4.2%.
Can Grandparents Take Out Parent PLUS Loans?
No, grandparents cannot apply for parent PLUS loans even if they have legal guardianship of the student or have been responsible for raising them. However, private student loans may be an option that grandparents can look into if they want to help their families.
Workarounds if You Want a Parent Plus Loan but Have Adverse Credit History
If you have late payments or delinquencies on your credit report, getting approval for parent PLUS loans may be difficult. However, that doesn’t mean it’s impossible. Even if you don’t have the best credit history, you may be able to access these federal loans. Here are some things you can do to help yourself:
- Getting an Endorser and Complete Plus Credit Counseling — An endorser can be seen as a co-signer. They will need to have good credit and be okay with the responsibility of repaying the parent PLUS loan if you cannot. The endorser cannot be the student for whom this parent PLUS loan is being inquired for.
- Appealing with the U.S. Department of Education — Parents may be able to get approval with bad credit by sending documentation (an appeal) to the U.S. Department of Education and completing PLUS Credit Counseling.
You have two options for how to frame the appeal. If the information on your credit report is incorrect, then you’ll have to prove it. Or, if things are correct, you will have to explain the extenuating circumstances that lead to the adverse credit history with the proper documentation supporting your claims.
The Process of Applying for a Parent PLUS Loan
Before learning about the general application process for a parent PLUS loan, knowing that every school may work differently will be helpful. In most cases, schools will ask that you apply for a parent PLUS loan online; however, that is not always the case. And so, it is essential to get specifics from the school’s financial aid office.
With this in mind, here is what the general application process will look like with a parent PLUS loan:
- Ask Your Child To Fill Out a FAFSA Loan Application — Head to studentaid.gov to get started. If your child doesn’t already have a login, they will have to create one.
- Fill Out the Parent Plus Loan Application — This will take about 20 minutes to complete, and you will need the following information:
- Parent’s verified FSA ID.
- The requested loan amount.
- School name.
- Student information (first name, middle initial, last name; Social Security Number; date of birth; permanent address; telephone number).
- Personal Information (permanent and mailing address, telephone number, and email address).
- Employer’s Information (employer’s name, address, and telephone number).
- You will have to be okay with a credit check.
- Wait for the School’s Response — Once you submit your application, that information will be sent to your school. Your school will let you know about eligibility and loan amounts.
The Master Promissory Note
The Master Promissory Note or MPR is a legally binding document in which the loan borrower promises to repay their principal loan funds, interest, and fees. Along with being a contract, it has important terms and conditions of your loan. You must complete this to fulfill your application requirements.
Repayment With a Parent Plus Loan
Repayment with a parent PLUS loan will depend on whether or not you ask for a deferment—which is essentially a student loan pause. If you do ask for a deferment, then you will not need to make payments while/until:
- The dependent undergraduate student is enrolled for at least half-time.
- Six months after they leave school.
- Six months after they fall below half-time enrollment
- After the student graduates.
Keep in mind that deferment still means that interest will accrue. Once you start paying, you can pay the interest immediately or add it to your loan’s principal balance, also called interest capitalization.
If you do not want to defer your parent PLUS loan, your payments will begin after the loan disbursement.
Your loan servicer will keep you updated about the due dates of your loan payments, including your first monthly payment.
Alternative Funding Options
Generally, when considering student loan options, there are a few different kinds that you will find:
Direct Subsidized Loans
Direct subsidized loans are available for undergraduate students who need help paying for a four-year university, community college, or trade school. With direct subsidized loans, there is no interest charged in a few instances:
- While the dependent undergraduate student enrolled in school is doing so for at least half-time.
- During a grace period.
- Deferment periods.
A Direct Unsubsidized Loan
Direct unsubsidized loans are available for undergraduate, graduate, and professional students; these are not based on financial need. Interest rates for direct unsubsidized loans will start accumulating right away and there are no grace or deferment periods.
Direct Consolidation Loan
Direct consolidation loans combine a borrower’s student loans into one single loan. For many people, this may help with student loan management and make monthly payments more affordable. For example, you only have to pay attention to a single account instead of having multiple balances with several loans.
A Private Loan vs. A Parent Plus Loan/ a Federal Student Loan
These are the only options that don’t come from the federal government. Private student loans can be found with traditional financial institutions like banks or credit unions and private lenders who operate online or in person.
Private student loans may not have the flexibility of most federally funded loans. For example, there won’t usually be the grace and deferment periods that a student may get from federal loan options such as a parent PLUS loan.
Another example you may notice is that federally funded student loans often have flexible repayment plans that private lenders do not offer for borrowers, such as the income-contingent repayment plan, which can be extremely helpful for low-income households.
When it comes to cost, chances are that the interest rate for private student loans will be significantly higher than for federal student loans.
And the last advantage is that with federal student loan debt, borrowers may be eligible for student loan forgiveness programs such as public service loan forgiveness, while private options will not.
These are just a few reasons students and their families are often encouraged to apply for federal aid before considering a private student loan.
Pros and Cons of a Parent PLUS Loan
Just like with any loan, there will be some pros and cons you should consider when deciding on a parent PLUS loan. Here are some of the advantages and disadvantages:
Advantages of Parent Plus Loans
Here are some of the positives of parent PLUS loans that both the parent and dependent student should be aware of:
They Can Help if the Financial Aid Received Isn’t Enough
Parent Plus loans can be a good way to fill in any financial gaps after federal student funding.
An Easy Way for Parents To Support Their Children
Parent PLUS loans can be a more affordable and manageable option for parents who want to support their children without having to give them money outright. And parents can rest assured that the funds will be used toward education.
Usually Better Interest Rates Than a Private Student Loan
Because direct PLUS loans are federal student loans, the interest rates are fixed and aren’t based on your credit history (bad credit can mean high-interest rates with private student loans).
Flexible Repayment Plans Compared to a Private Student Loan
As mentioned earlier, parent PLUS loans may provide flexibility with repayment, as they offer several repayment plans. When working with a private lender, you may not be able to get this type of flexibility. Why is loan repayment flexibility important? Well, it can mean the difference between being able to make your loan payments or not.
Defer Repayment With a Parent Plus Loan
You can choose to defer payment for a parent PLUS loan, which will be a huge plus if you don’t currently have all the discretionary income you need to manage another loan. Remember that interest will still be charged on your PLUS loan during deferment.
Potential for Loan Forgiveness With a Parent PLUS Loan
Like most federal loan options, a parent PLUS loan may be eligible for loan forgiveness, such as public service loan forgiveness; you may not find this flexibility with a private student loan.
Cons of Federal Parent Plus Loan Funds
Along with their advantages, parent PLUS loans also have their disadvantages; here are some cons you should consider when deciding whether parent PLUS loans are right for you:
There Is a Credit Check Required With These Federal Student Loans
Potential parent borrowers will need to undergo a credit check. If they have the following information listed on their credit report within the last five years, they may not qualify:
- Wage garnishment.
- Tax lien.
- Foreclosure or repossession.
- Bankruptcies.
- Various delinquent credit accounts.
- Defaulted debt.
Relatively High-Interest Rates When Compared To Other Federal Loan Programs
Parent PLUS loans have much higher interest rates than other forms of student financial aid. And it’s not just the loan interest rate that is higher; the origination fee for one of these loans is also about 3% higher than other federal student loans. So applying for those other federal student aid or federal loans beforehand may be essential to save money!
Accrues Interest On the Loan Balance During Deferment
Deferments can be extremely convenient for both dependent undergraduate students and their parents. However, this period also usually means accruing interest, which can increase your total loan balance and debt. So keep that in mind when you sign up for a deferment.
Limited Repayment Options When Compared To Other Federal Loan Money
Other forms of federal student aid and loans have more repayment plans. For example, a parent PLUS loan will not be eligible for a pay-as-you-earn repayment plan (PAYE), income-based repayment plan (IBR), or a revised pay-as-you-earn repayment plan (REPAYE).
Parents Will Not Be Able to Transfer Responsibility to the Student
If parents do decide to take on this responsibility of debt, they will be legally responsible for repaying the loan. Regardless, if they have come up with some kind of agreement with their child outside of the legal contract, the student will not be held responsible.
There Is No Loan Limit
Parent PLUS loans do not have an annual loan limit. This may seem like a good thing, as you may be able to borrow as much funding as your child needs if the financial aid offered isn’t enough. However, if you need to borrow a lot of funds every year, that can mean a lot of debt you will be responsible for repaying.
When May a Parent PLUS Loan Be a Good Idea?
Now that you know much more about what a direct PLUS loan is, you may wonder when it is best to strategically take out one of these loans. Below are some scenarios that, when occurring together, may make parent PLUS loans a good option to consider:
Your Child Has Reached Their Financial Aid Limit
If your child has exhausted their other financial aid options and needs additional funding to go to their school of choice, then a parent PLUS loan can definitely help make that happen.
You Are Completely Sure You Can Take on the Responsibility of the Loan
Let’s say whatever debt you may incur with a parent PLUS loan won’t completely turn your financial situation upside down. If you know you can comfortably repay the student loan back, then it may work well to help your child get the education they need.
You Want To Avoid Taking on Private Student Loans
If your child has exhausted financial aid and you want to avoid private student loans, then a parent PLUS loan may be a great alternative.
If you’re interested in learning more about personal loans, student loans, or even grad plus loans, check out the rest of the CreditNinja Dojo!
References:
Parent PLUS Loans | Federal Student Aid
Parent PLUS Loans | Federal Student Aid
Read-only Version of the Parent PLUS Loan Application | Federal Student Aid
Are Direct PLUS Loans eligible for Public Service Loan Forgiveness (PSLF)? | Federal Student Aid
Master Promissory Note (MPN)
11 Pros And Cons Of Parent PLUS Loans | Forbes Advisor
