The constantly rising cost of a college education has made student loans almost a necessary part of the higher education experience for many U.S. students. The average student loan debt is $27,975 for borrowers from the Class of 2016.
The majority of student loans are originated by the federal government, which offers a wide variety of loan products to meet students’ financing needs. One of those products is called the Direct PLUS Loan, which helps thousands of students fund their education each year.
On this page:
- Types of Direct PLUS Loans
- How to Apply for a Federal Direct PLUS Loan
- Repayment Options
- Direct PLUS Loans vs. Private Student Loans
Types of Direct PLUS Loans
There are two major kinds of Direct PLUS loans. One is for parents who would like to borrow for their children’s education, and the other is for graduate students. Each of them has their own criteria, benefits, and specifications.
Parent PLUS Loans
The Parent PLUS loan is geared for parents of undergraduate students. Parents can take out a loan specifically for the student’s school expenses. In order to qualify, they need to meet the following qualifications:
- Be the parent (biological, adoptive, or in some cases, a stepparent) of a dependent undergraduate student enrolled at least half-time at an eligible school
- Have a healthy credit history
- Meet the general eligibility requirements for federal student aid. For Parent PLUS loans, the student must also meet the requirements.
There are two situations in which you can still borrow on behalf of your child even if you have poor credit. The first is if you get an endorser, which is much like a cosigner. The endorser cannot be the student you are borrowing for. The second is if you can document extenuating circumstances for your poor credit history, such as an account that is showing unpaid when you can prove that you’ve already paid it, or that you’ve made payment arrangements with the creditor and have made at least six months’ worth of on-time payments.
A full list of extenuating circumstances is available on the federal student aid website.
Each school publishes a Cost of Attendance each year, which is the total amount your child can expect to pay if they attend school there. That amount includes tuition, books, room and board, fees, and other costs associated with your education. When borrowing a Parents PLUS loan, the maximum amount you can get is determined by taking this cost of attendance and then subtracting any other financial assistance received, such as federal grants, third-party scholarships, and other student loans.
The interest rate on Direct Parents PLUS loans is 7.6% for all new loans disbursed before July 1, 2019, and that rate is fixed for the life of the loan. There’s also an origination fee on all new loans. The fee is 4.248% for loans disbursed after Oct. 1, 2018. The fee amount is taken out in addition to the original loan amount and added to the balance, where it will also accrue interest.
Graduate PLUS Loans
If you’re an independent graduate student, you can apply for a Grad PLUS loan yourself without your parents. Many of the conditions and stipulations are the same. You’ll need a good credit history or extensive documentation and you must be enrolled in an eligible graduate program at least half-time.
Like the Parents PLUS loan, the graduate version has a 7.6% interest rate that is fixed for the life of the loan. You can borrow up to the total cost of attendance minus any previous financial aid, and it also carries a 4.248% origination fee.
How to Apply for a Federal Direct PLUS Loan
The first step to applying for the PLUS loans, regardless of whether you’re a graduate student or a parent of an undergrad student program, is to complete the Free Application for Federal Student Aid. The FAFSA, as it’s known, gives the federal government and your chosen school a good view into your finances and how much of your education you can afford to fund.
Many schools require that you request a Direct PLUS loan directly from the StudentAid.gov website, which has an application for each type of PLUS loan. For the FAFSA and the loan application, you can expect to provide a copy of your last federal income tax return, bank statements, and information on any debt and financial obligations. If your school has its own process for applying, your financial aid office can explain what they’ll need.
Direct PLUS loans are a bit different than more standard student loans, but there are still several options available for repayment. If you’re taking out a Parents PLUS loan, however, be aware that you have slightly fewer options available than graduate students getting their own PLUS loans.
This is the default repayment plan. All borrowers are eligible for it regardless of their loan program, and you’ll pay less money over the life of the loan. With the standard repayment plan, your payment amount is fixed, and your loans will be paid off within 10 years. If you don’t request another payment plan, this is the payment schedule you’ll be assigned.
This plan is geared to help those who need a bit of time after graduation to find a job, start earning money, and increase their total earning power. Payments are lower at the beginning of the repayment term and increase about every two years as your earnings increase. You’ll still end up paying the loan off within 10 years, but you’ll pay a bit more in accrued interest than under the Standard plan.
This is a plan meant to keep monthly payments as low as possible, and it does that by stretching out the loan term to 25 years. You must have more than $30,000 in outstanding loans, and you’ll pay far more in total on this plan than you would on others.
Revised Pay as You Earn Repayment (REPAYE)
The REPAYE program is only open to PLUS loans for graduate students, not parents. It’s an income-drive plan that holds your payment amount to 10% of your monthly discretionary income, which is money left over after you pay for housing, food, clothing, and medical care. Each year your payment amount will be recalculated based on your income and family size. Under this plan, you’ll also count any of your spouse’s loan debt, if applicable.
Pay as You Earn Repayment (PAYE)
The PAYE program is like the REPAYE plan in that it holds your monthly payment amount to 10% of your discretionary income. Where it differs, however, is that the maximum amount is capped at whatever your payment amount would be under the Standard Plan. It’s not available for Parent PLUS loans, but is open to graduate students.
Income-Based Repayment (IBR)
Under the IBR program, your payment amount is 10% to 15% of your discretionary income, but never more than the Standard payment amount. Your loans will be forgiven if you haven’t paid them off after 20 years. IBR is only open to graduate students with PLUS loans. Parents are not eligible. Keep in mind, however, that the federal government will also view the amount you get forgiven as income. You may need to pay taxes on that amount at the end of that tax year.
Direct PLUS Loans vs. Private Student Loans
Most federal loans don’t require a credit inquiry and are based on financial need. PLUS loans, however, more closely resemble student loans from private lenders as they are based more on your creditworthiness as a borrower than your level of need. The interest rates are also closer to a private lender than the typical federal student loan.
|Federal Direct PLUS Loans||Private Student Loans|
|Interest Rate||7.6%||3.99% – 14.87% (average)|
|Term Lengths||10 – 25 years||Depends on the lender|
|Maximum Loan Amount||The full cost of attendance, minus any financial aid you may have received.||Up to the full cost of attendance, depending on the lender.|
|Repayment Options||Many, including income-based repayment (Parents PLUS loans have less options)||Usually require payment of at least interest to begin immediately; some lenders have more flexible options.|
Direct PLUS loans aren’t designed to cover 100% of your educational costs. They’re far more expensive than other federal loans, and in many cases they’re more costly than private student loans as well. The high fees and interest rates make them more of a last resort option than something you should be considering at the beginning of your financial aid search.
If, however, you find that you’ve exhausted your other federal financial aid options, and you’ve looked into scholarships, grants, and even state-based aid, a Direct PLUS loan could help fill any funding gaps you may have.
Not every family can meet their Expected Family Contribution, and some students end up still needing more money after all of their traditional financial aid avenues have been explored. If that’s the case for you and your family, you may want to consider a Direct PLUS loan.
Author: Jeanette Perez
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