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What is a Parent PLUS Loan?
A Parent PLUS Loan is a type of loan borrowed by a parent of a dependent undergraduate student to cover education expenses. They are a part of the Direct PLUS Loan program organized by the U.S. Department of Education.
Unlike other federal student loans, Parent PLUS Loans have no limits and can be used to pay the full cost of attendance (excluding any additional financial aid that the student had received). It has a fixed interest rate and an average repayment period of 10 years.
How to apply for a Parent PLUS Loan?
The student loan application process typically starts with filling out the FAFSA (Free Application for Federal Student Aid) form. It can be done on the official website fafsa.gov or in a different way suggested by your school's financial aid office. The FAFSA needs to be completed by the student.
To apply for a parent plus loan, you should go to the Direct PLUS Loan Application for Parents page on the Federal Student Aid website. There you will find a list of schools-participants in the Direct Loan Program. The website has information on the application process for every school. Usually, you can apply online, but if the school has a different procedure, you should contact their financial aid office for details.
In any case, the parent is required to complete the MPN (Federal Direct PLUS Loan Master Promissory Note). It is practically a "terms and conditions" document stating how and when you should repay your loan.
What are the main requirements for getting a Parent PLUS Loan?
Parent PLUS Loans are naturally obtained by a parent for their student child, so there is a different set of requirements for both.
Parent
You need to be a biological or adoptive parent of a dependent student who needs financial aid to qualify for the loan. Grandparents, other relatives, and possible legal guardians cannot get a Parent PLUS Loan.
You also mustn't have an adverse credit history. Your credit report shouldn't contain negative marks (such as 90-days debt repayment delay, default, bankruptcy, tax lien, or repossession). If you have one of those and need the finances, you can apply for the loan with an endorser. It is also important to note that federal student loans do not require any particular credit score as private student loans do.
Last but not least, you need to be generally eligible for federal financial aid: be an American citizen or an eligible non-citizen and have a Social Security number.
Student
Your child must be a dependent undergraduate student enrolled at a college that participates in the Direct Loan Program. Dependency status means that the student is aged 24 or under, is not married, not a veteran, not a graduate student, and has no dependents.
Students need to be eligible for federal student loans: be a U.S. citizen or an eligible non-citizen and have a decent federal loans history. They will not qualify if they are in default on one of their current federal student loans or owe an overpayment for a grant.
Ways to get a Parent PLUS Loan
The loan disbursement is typically done directly to the students' school in two installments. Then, the financial aid office distributes the money between tuition, room and board expenses, and other fees.
Within two weeks, the remaining loan funds are transferred directly to the parent borrower's bank account. Parent borrowers can also authorize the school to debit the federal loan money into the student's account.
Unlike private student loan lenders, the federal government does not provide various ways to receive loan funds. The two options to receive money are direct debit to the borrower's bank account and a check issued by the educational institution the student attends.
How to repay a Parent PLUS Loan
The first decision regarding loan repayment you have to make is whether you want to start making loan payments right away or after your child graduates. It is recommended not to defer paying for the loan because the accrued interest during the pause significantly increases the overall loan balance. Moreover, deferment will most definitely postpone loan forgiveness (if you wish to pursue it).
Once it is time to commence repaying, your Parent PLUS Loan servicer will contact you about billing details and loan repayment options. Generally, you will have to choose one of the following plans.
Standard Repayment Plan
This plan has the shortest repayment term of 10 years and a fixed monthly payment condition. It is designed to minimize your overall interest rate payments. The federal loan providers automatically put you on this plan if you do not choose a different one.
Graduated Repayment Plan
This plan has flexible monthly payment conditions: you can start by paying lower sums and gradually increase the amount you pay over ten years. Parent PLUS Loan borrowers who plan to increase their income might find this plan the most suitable.
Extended Repayment Plan
Naturally, this plan implies a prolonged repayment period, usually up to twenty-five years. Under an extended plan, payments can be either fixed or graduated and are generally lower than monthly payments on other plans. Parent borrowers who owe more than $30,000 are eligible for this plan.
Income-Contingent Repayment Plan
ICR plans are generally not available to direct plus loan borrowers. Still, Parent PLUS Loan borrowers can consolidate multiple loans into one Direct Consolidation Loan and pay it back under the ICR plan.
The payments on this plan are not fixed and depend directly on your family income. They can be either 20 percent of your discretionary income or the amount you would pay on a fixed plan over 12 years (recalculated according to your income).
You must provide an update on your income to the loan servicer every year (even if there were no changes whatsoever). The annual recertification of your payment amount needs to be done by reapplying for the income-contingent repayment plan. If the amount of money you get paid changes drastically during the year, you can contact the lender and update the plan.
The overall regulations for Direct Plus Loan repayment are: you can switch plans anytime; early payments are not penalized; deferment is allowed.
Deferment is possible if the student has at least half-time enrollment at an eligible school and during the six months after they are no longer enrolled.
Another option to postpone making loan payments is forbearance. You can temporarily reduce the monthly payment amount or extend the repayment period if you qualify for it.
Technically
It is possible to make payments via direct debit or checks on all of the plans. However, it is recommended to go for the Automatic Payment Withdrawal, which authorizes the servicer to deduce the required amount of money right from your bank account (savings or checking).
Pros and cons of a Parent PLUS Loan
Before filing a Parent PLUS Loan application, there are several advantages and disadvantages to consider.
Pros
- Unlimited aid. Parent PLUS Loans have no limit when it comes to the number of funds you can receive. It helps cover various expenses that aren't typically considered in other loans.
- Fixed interest rate. While overall payments can be flexible and graduated, the interest rate on a federal parent loan is fixed for the whole period of repayment.
- Flexible repayment. There are four repayment plans on this loan, and the client can choose the most suitable one and switch to a different one if needed. Such flexibility is rare for financial institutions and the federal government.
- Possible deferment. A parent can choose not to pay for the loan until their child graduates from school, which gives them time to figure out the best repayment strategy.
- Forgiveness. Direct consolidation loan holders are eligible for Public Service Loan Forgiveness program.
Cons
- Higher interest rates. Currently, there is a6.28% fixed interest rate for all Parent PLUS Loans. Interest rates on other student loans are usually 4%-5%.
- Loan fees. There is a high origination fee of roughly 4.2% for each disbursement on Parent PLUS Loans. Private student loans can be less expensive since they don't have such fees.Credit check. Borrowers with an adverse credit history are likely to be denied when applying for a Parent PLUS Loan because a credit check takes place.
- Default risk. Since there is no limit to the amount you can borrow, there is a risk of overestimating your repayment capability. The outcome of that can be a loan default.
- Not many income-driven repayment options. Income-driven repayment is a great possibility to stay on the repayment track for families with unstable incomes. Parent PLUS Loans, however, only provide the ICR option.
Legal regulation of a Parent PLUS Loan in the USA
Legal student loan regulation mainly focuses on private student loans since non-governmental lenders are more likely to deceive and abuse students' financial vulnerability.
Parent PLUS Loans are regulated by the U.S. Department of Education, which makes changes to the federal PLUS loan policy if an issue arises. Such changes were made in 2011, when the loan eligibility criteria were tightened to protect people from default risks.
If you have a complaint regarding your parent plus loan, you are entitled to contact one of the following organizations: student loan servicer, state attorney general, state education department, the U.S. Department of Education, Consumer Financial Protection Bureau, or Federal Trade Commission.
The real cost of a Parent PLUS Loan
The cost of a Parent PLUS Loan is a combination of several elements: initial loan amount, origination fee, and interest.
The initial loan amount can vary from several thousand dollars to more than $30,000. The origination fee is 4.228%, and the interest rate is 6,28%.
If you take out a $10,000 loan, you will end up paying a $422 origination fee plus a $628 interest for every year of repayment (which can be up to 25 years with deferment and forbearance). If it is a 10-year repayment period, you can overpay as much as $6280.
The bottom line here is that Parent PLUS Loans are typically used to cover gaps in funding that other financial aid cannot cover. In other words, people tend to take out no more than a couple of thousands of dollars and try to repay them as early as possible to avoid accumulating interest.