Complete Guide to Parent PLUS Loans

parent plus loans

The traditional college student is a recent high school graduate, and so it’s likely that their parents will assist with the costs of school. The Free Application for Federal Student Aid (FAFSA) even asks about household income and ability to help pay for college. But what happens when parents can’t afford to contribute from their bank accounts or investments, and students find themselves still falling short on financial aid?

As parents, the task of saving for college is becoming more difficult by the day. The price of the average college education has risen drastically in the last decade. Keeping up is tough. To help parents contribute to their son or daughter’s education the federal government created the PLUS loan.

What is a Parent PLUS Loan?

A Parent PLUS Loan is a student loan offered to parents of students enrolled at least half time in eligible programs at participating and eligible post-secondary institutions or graduate and professional students at participating and eligible postsecondary institutions.

It’s designed for students who can’t afford to pay for school and whose parents can’t afford to pitch in for those remaining costs. The loan is geared to allow parents to help fill the gap when additional funds are needed after scholarships, grants, and other student loans.

Under the Parent PLUS loan the federal government is the lender, which means the loan will be administered by one of the servicing companies contracted by the Department of Education.

Who is Eligible and How Do I Apply?

To be eligible for a Parent PLUS loan, you must be the legal parent (biological, adoptive, or stepparent) of an undergraduate student attending an eligible school at least half-time. You must also have a good credit history, as the government will perform a credit check before approving the loan.

If you have adverse credit, you might still be able to get approved if you jump through a few more hoops. You can either prove, with documentation, that there are extenuating circumstances involved with your credit history (a full list of documentation needed is available at the website), or you can get a co-signer who isn’t the student you’re borrowing for. In both instances, you’ll need to participate in credit counseling to be approved.

What makes the Parent PLUS loan different from other federal student loans is that it’s taken out by the parents, not the student; in fact, the student has no obligation to pay it back or deal with its maintenance. In order for the parents to apply, however, the student must fill out a FAFSA form to show the total family financial situation. Once the FAFSA is done, you and your student should contact the school’s financial aid office for their specific application process.

Eligibility Requirements

There are some requirements parents and children must meet for the parent to be eligible to borrow via a PLUS loan.

Parent:

  • Must be a parent (or step-parent or adopted parent) of a dependent student
  • Be a U.S. citizen or eligible non-citizen and provide a valid Social Security number
  • Pass a credit check from a registered agency
  • Cannot be in default on another federal student loan or owe a refund on any federal student aid program

Student:

  • Must be enrolled at least half-time at the education institution
  • Must be less than 24 years of age
  • Must have NO dependents registered
  • Cannot be in default on another federal student loan or owe a refund on any federal student aid program

Before using PLUS, students should strongly consider using a Direct Federal Stafford Loan or Perkins Loan. What about legal guardians? Legal guardians may not borrow via a PLUS loan. Even so, there are options available in the private loan market. Private student loans are an interesting option for credit-worthy individuals willing to take on the financial responsibility of the student loan.

More Details About Parent PLUS Loans

Application Process

To apply for a Parent PLUS Loan, you will first need to fill out the FAFSA. The school that your child is attending will send you more information about requesting the Parent PLUS Loan. It should be noted that certain schools are not eligible for PLUS Loans, though most are. 

Limits

The maximum amount parents can borrow via Parent PLUS Loans is the maximum cost of attendance of the college or university minus any other aid that was accepted (such as grants, scholarships, or other student loans).

Interest Rates

Though the interest rates vary from year to year, currently, for the 2017-18 school year, Parent PLUS Loans have an interest rate of 7%. This is a fixed rate that will not change over the life of the loan. Furthermore, the interest rate does not change based on creditworthiness. A credit check is required, but only to ensure that there are no serious adverse marks.

Fees

Unfortunately, Parent PLUS Loans do come with an origination fee. The fee is a percentage of the total loan amount. Currently, for loans taken out from October 1, 2017 through October 1, 2018 are charged a 4.264% origination fee. So, for example, if you take out a $10,000 loan, you will be charged $426.40. 

Aside from the origination fee, there are no application fees, prepayment fees, or any other kind of fees associated with Parent PLUS Loans.

Repayment

Unlike federal student loans for students, Parent PLUS Loans require repayment to start immediately. You can, however, request deferment while your child is enrolled at least half-time and for up to 6 months after he or she graduates or leaves school - regardless of the reason. It should be noted that your loans will still accrue interest during deferment.

The standard repayment plan for Parent PLUS Loans is 10 years. There are, however, other options available. You can extend your repayment plan for up to 25 years with an Extended Repayment Plan, but this will increase the total cost of your loan. Another option is a Graduated Repayment Plan, in which payments are lower in the beginning of repayment and increase every year, but this too will increase your total loan cost. 

Another option for repayment is to refinance your Parent PLUS Loans with a private lender. If you have good credit, you can often receive a much lower interest rate by refinancing, saving you lots of money in interest. You may also be able to transfer the loan to your child via refinancing if your child agrees and the lender allows it. 

What are the Terms of a Parent PLUS Loan?

The total amount for a Parents PLUS loan is determined by the school, which subtracts any other financial aid from its stated cost of attendance, or COA. That resulting amount is the maximum you can borrow on behalf of your student.

Interest rates for this loan are currently fixed at 7 percent for the life of the loan, and each loan has a fee attached to it as well. When the loan is disbursed, 4.264 percent of the total loan amount is deducted from the disbursement as a loan fee. Parents can pay back the loan in terms ranging from 10-25 years depending on the repayment plan chosen.

How Do I Pay Back a Parent PLUS Loan?

Parent PLUS Loans are a bit different in terms of repayment. Because they’re not taken out by the student, they’re not eligible for any of the income-based or income-sensitive repayment plans offered by the Department of Education. In addition, parents are expected to start paying back the loan as soon as the funds are disbursed to the school or the student, although they can request a deferment for as long as the student is in school, and up to six months after graduation.

The standard repayment plan has fixed payment amounts and will cost less over the life of the loan. Also available is the graduated plan which sets up lower payments at the beginning but increases them over time, and the extended payment plan which offers the most flexibility for parents. Under the extended plan, parents may extend the loan term for up to 25 years, and can have fixed or graduated payments. It’s also the most expensive plan over the life of the loan available to PLUS borrowers.

If your student has already exhausted his or her financial aid options in terms of scholarships, grants, and other student loans but is still coming up short, a parent PLUS loan might be the right choice for you and your student. You can find out more information at the StudentAid.gov website.