Embarking on the journey of sending your child to college is a proud moment filled with hopes and dreams. It's a path of opportunity, especially for our first-generation college students. As a parent, your role is pivotal in this journey, and it’s important to navigate the financial aspects with care and understanding. One option you might be considering is a Direct PLUS Loan, commonly referred to as a Parent PLUS loan when made to a parent borrower. These loans, while offering a means to support your children's education, come with their own set of challenges and implications. This blog is designed to provide a clear understanding of what Direct PLUS Loans are, their pros and cons, and everything else parents need to know to make an informed decision.
What are Direct PLUS Loans for Parents?
Direct PLUS Loans are federal loans that parents of dependent undergraduate students can use to help pay for college or career school. These loans are provided by the U.S. Department of Education. Unlike other types of student loans, they are directly in the parent's name, not the student's.
Eligibility Criteria
To be eligible for a Parent PLUS Loan, you must be the biological or adoptive parent (or, in some cases, the stepparent) of a dependent undergraduate student who is enrolled at least half-time at an eligible school. You also need to meet general federal student aid eligibility requirements, which include being a U.S. citizen or an eligible non-citizen, and you must not have an adverse credit history.
How Much Can You Borrow?
The maximum amount you can borrow with a Parent PLUS Loan is the cost of attendance (as determined by the school) minus any other financial aid your child receives. This means the loan can cover a wide range of expenses, including tuition, room and board, books, supplies, and even transportation. For example, if your child's cost of attendance is $10,000, and he or she receives $6,000 in other financial aid, you can borrow up to $4,000 in PLUS Loans.
Interest Rates and Fees
Parent PLUS Loans have a fixed interest rate, which is set by the federal government each year. For Direct PLUS Loans first disbursed on or after July 1, 2023, and before July 1, 2024, the interest rate is 8.05%. View the latest interest rate information at
In addition to interest, there's also a loan fee that is a percentage of the principal amount of the loan. The Department of Education deducts the fee before you receive any loan money, so the loan amount you actually receive will be less than the amount you have to repay. The percentage for all Direct PLUS loans first disbursed on or after Oct. 1, 2020, is 4.228%. See StudentAid.gov/interest for current loan fee rates.
The Application Process
Most schools require you to apply for a Direct PLUS Loan online, but some schools have different application processes. Before applying for a parent PLUS loan, make sure your child has filled out the Free Application for Federal Student Aid (FAFSA) form.
Credit Check and Endorser Alternative
Unlike other federal student loans, Parent PLUS Loans require a credit check. If you have an adverse credit history, you might still be able to receive a loan by obtaining an endorser (someone who agrees to repay the loan if you cannot) or by documenting extenuating circumstances related to your credit history.
Repayment Options
Repayment of Parent PLUS Loans typically begins 60 days after the full loan amount for the academic year is disbursed. However, you can request a deferment while your child is enrolled at least half-time and for an additional six months after they graduate, leave school, or drop below half-time enrollment. The standard repayment plan lasts for ten years, but there are options for extended repayment plans that can last up to 25 years. You can become eligible for an additional repayment plan by consolidating your Parent PLUS Loans into a Direct Consolidation Loan. This can simplify repayment by combining multiple federal education loans into one loan with a single monthly payment.
Pros and Cons
Pros:
Full Cost Coverage: One of the most significant advantages is the ability to borrow up to the total cost of your child’s education, minus any other financial aid received. This includes tuition, room and board, books, supplies, and even personal and travel expenses.
Fixed Interest Rate: These loans have a fixed interest rate, meaning the rate stays the same throughout the life of the loan. This provides predictability in budgeting and planning.
Deferment and Forbearance Options: Both deferment and forbearance allow you to temporarily postpone or reduce your federal student loan payments. However, keep in mind that both options can lead to an increase in the total debt because interest still accrues (accumulates).
No Prepayment Penalty: You can pay off a Parent PLUS Loan early without any prepayment penalties. This flexibility allows you to reduce interest costs if your financial situation improves.
Potential for Loan Forgiveness: In some limited circumstances, your Parent PLUS loan may be canceled, discharged, or forgiven.
Cons:
Credit Check Requirement: Unlike other federal student loans, a credit check is required for Parent PLUS Loans. Parents with an adverse credit history may be denied or may need to find an endorser.
Higher Interest Rates and Fees: The interest rates for Parent PLUS Loans are typically higher than those for other federal student loans. Additionally, there is a loan origination fee, which is a percentage of the loan amount and is deducted from each loan disbursement.
Risk of Overborrowing: Given the ability to borrow up to the full cost of attendance, there’s a risk of taking on more debt than you can comfortably repay, especially considering the higher interest rates. A big concern with the Parent PLUS loan is that it doesn't check if parents can comfortably pay it back. The Department of Education treats these loans more as a way to help students access higher education, and unlike traditional bank loans, they don't do the usual checks on income and assets to see if parents can afford the repayments. This can lead to parents borrowing more than they can handle, so borrow only what is necessary and what you feel confident you can repay.
Repayment Responsibility: The loan is solely in the parent's name, which means you are fully responsible for repaying the loan. This can be a significant financial burden, especially if you are nearing retirement or have other financial obligations, such as student loans from your own education.
Impact on Credit and Retirement: Failure to repay a Parent PLUS Loan can negatively impact your credit score. Additionally, taking on significant debt later in life can delay or compromise retirement plans.
No Subsidized Interest: Unlike some federal student loans, there is no subsidy for the interest on Parent PLUS Loans. Interest accrues from the time the loan is disbursed.
Taking out a Parent PLUS Loan is an important decision, but it’s not one you have to make alone. Here are some steps to guide you:
Explore All Options: Exhaust all "free money" options first. Scholarships and grants do not need to be repaid and can significantly reduce the amount of loans needed. Ensure your child has taken advantage of their own federal student loan options, which often have lower interest rates and more flexible repayment terms.
Calculate the Costs: Understand the total cost of the loan, including interest and origination fees. Ensure that the expected monthly loan payments are manageable alongside your other financial commitments. Use Loan Simulator to get an early estimate of what your monthly payment amount would be under the repayment plans for which you’re eligible.
Student's Earning Potential: Consider the career path and potential starting salary your child is aiming for. This will impact their ability to contribute to loan repayments or support you if needed.
Use College Scorecard: For a clear understanding of what borrowing might look like at different colleges, turn to the College Scorecard. It provides valuable information on Parent PLUS loans, in addition to data on college costs, graduation rates, and post-college earnings. You can review the Parent Borrowing Rate, the Median Total Debt After Graduation, and the Typical Monthly Loan Payment at various institutions. This tool can help you compare and choose a college that aligns with your financial situation.
Seek Guidance: Don't hesitate to ask for help or clarification. There’s no harm in asking questions to ensure you understand every aspect of the loan you're considering.
Parent PLUS Loans are just one tool in a larger toolkit. With the right information and support, you can make the best decision that supports your child's educational goals while also maintaining your financial health.
-------
Understanding student loans is just one part of applying to college. At Uprooted Academy, we are here to support you every step of the way.
Additionally, we host a series of free events throughout the year, including workshops on college admissions, financial aid, and more. We’re excited to announce our inaugural Major and Career Fair scheduled for March 16th, 2024, where students can explore a world of career opportunities and gain valuable insights. Our goal is to empower students with the knowledge and resources they need to make their college and career dreams a reality. It's an opportunity you won't want to miss!
Comments