How Direct PLUS Loans help pay for College
Direct PLUS Loans (also known as Parent Plus Loans ) are simply federal loans that parents can take out to help their children pay for college.
Now parents I know what you are thinking. In fact there are many aspects about this that are making you cringe. The fact that your child is coined as a dependent student and that is limiting the amount they can borrow is one but also the fact that you may have to take out an additional loan to help them can be frustrating.
Whichever the reasons are, a Parent PLUS Student Loan may be needed based on your particular situation. So let’s buckle down and dig into the details of Parent Student Loans.
What is the Parent PLUS Loan?
The Parent PLUS Loan is a federal direct student loan available to the parents of dependent undergraduate students. The Direct Parent PLUS Loan will come with a fixed interest rate and the parent (the person applying) can’t have an adverse credit history. Again the intent is for parents to assist their children pay for college.
I’ve seen many students in my career go back and ask their parents if they would be willing to do a Parent PLUS Loan this way they are not continually paying out of pocket and having a massive debt in their first two years of college.
Important to Know for Direct PLUS Loans
So here are some important things to know about the Plus Loan:
- The U.S. Department of Education is your Lender.
- The maximum PLUS loan amount you can receive is the cost of the attendance which again is determined by the school minus any other financial aid received.
- Being approved may not equate to being able to afford the payments. You shouldn’t just assume this. Some parents get approved and then realize they cannot afford the monthly payments.
- The Parent PLUS Loan can’t be transferred to the student.
Direct Parent PLUS Loan Eligibility
So let’s get to the nuts and bolts about the eligibility requirements for the Direct PLUS Loan.
- Must be a parent of an eligible undergraduate student.
- Enrolled in at least half-time
- Cannot have an adverse credit history.
- Must meet the general federal aid requirements.
Pros and Cons of the Direct PLUS Loan
So is the Parent PLUS Loan worth it at the end of the day? Let’s look at the pros and cons
- No limits when it comes to borrowing (even though you have the cost of attendance as your limit) but there are no capped amounts overall
- Super helpful if your child falls short and you cannot cover the Expected Family Contribution
- You can take out more loans then you can afford to pay back
- Need to ensure you can handle the repayment
- Have to pass a credit check
Parent PLUS Loan Application
For parents wanting to help out their child, how does one apply for the PLUS Loan? The first step is to complete the FAFSA. Once the FAFSA is completed and you are in need of the PLUS loan, you can head on over to studentloans.gov and on the Parent Borrows tab you will see “Apply for a PLUS Loan.” If deemed eligible for the loan, then the parent will be required to sign what’s called Master Promissory Note (MPN) agreeing to the terms of the loan.
Credit requirements for PLUS Loans
I’d like to spend more time talking about the specific credit requirements for the PLUS Loans. The credit check a parent will need to through is known as a “hard inquiry.” This means that it may have a slight impact on your credit. There is no minimum score required however, the main thing that is being looked for is an adverse credit history.
What Makes a Credit History Adverse?
We keep saying the word “adverse” but what makes up an adverse credit history? Now to note that if a parent has an adverse credit history the parent can still borrow however, they will need to submit an appeal. If a parent doesn’t submit an appeal for the exceptional circumstance, then they can submit the application with a cosigner that does not have the adverse credit history.
Below is what is considered as “adverse”:
- Current delinquency of 90 days or more on a total debt amount of $2,085.
- In collections for an amore more than $2,085 (or charged off the past two years prior to the date of the credit report).
- Bankruptcy discharge, tax lien, default, foreclosure, wage garnishment, repossession, or write-off of federal student loan debt in the past five years.
How much can you borrow?
The annual loan limit on a Parent Plus loan is the full amount cost of attendance minus other financial aid received by the student. Remember that cost of attendance is determined up to the school. There is no aggregate limits:
Now the cost of attendance includes:
- Tuition and Fees
- Room and Board
- Misc Personal Expenses.
What if Parent is denied?
A student convinces their parent to apply to the loan and they are happy. The parent is willing to help but then they apply and are denied! It stinks for sure, but there is a silver lining. The lining is that if a parent is denied for the Parent PLUS Loan, then the student becomes eligible for the same Unsubsidized Loan limits that is currently available to independent students.
Below you can see how the loan limits will increased based on the year of school you are in:
How is PLUS Loan received?
If approved (or denied) for the PLUS loan then how is it received? Much like the subsidized and unsubsidized loans, the school will first apply the PLUS loan to the student’s school account. It will satisfy tuition, fees, room and board, and then other school charges. Similarly, if there are funds that remain then the parent can receive those funds or authorize the student to receive them.
Can your Grandparent take out a Parent PLUS Loan?
To receive the PLUS Loan, you must be a biological or adoptive parent and be enrolled in at least half-time. However, sometimes students are being raised by their grandparents. So what if the grandparent wanted to apply for the loan. Can they?
So grandparents and legal guardians are not eligible to receive the parent PLUS loan, even if they have primary responsibility for raising the student. The only exception is that if they have legally adopted the depend student.
Parent PLUS Loan Interest Rate
The Direct Parent Plus Loan offers a fixed interest rate and this does not change over the lifespan of the loan. Currently the interest rates is 7.08%.
Every yeah on July 1st, interest rates are reset based on the market. When the loan is disbursed, the interest for the PLUS loan will start to add up. If not paid, then it will add up which will in return increase the size of the loan. Up to $2,500 per year in interest may be able to be deducted through the student loan interest deduction.
PLUS Loan Fees
So of course there has to be a fee right? The fee for the Parent PLUS Loan is an origination fee. The current origination fee is 4.248%. These fees are deducted from each loan disbursement. A borrower can consult with the college’s financial aid department to see if the amount can be increased on the loan to eventually cover the fees.
Parent PLUS Loan Repayment
The parent PLUS loan repayment normally begins no later than 60 days after the loan is full disbursed. There are the following repayment plans available:
- Standard Repayment Plan
- Graduated Repayment Plan
- Extended Repayment Plan
The standard repayment term on the PLUS loan is typically 10 years (gulp). Borrows may also qualify for a longer repayment period if they consolidate loans or have a total student loan amount borrowed of over $30,000.
Very important to note that the repayment on the Parent PLUS loan can be deferred. The student will need to be in school, enrolled in at least half-time or be in the six-month grace period after the graduate or drop out.
Trouble paying back PLUS Loan
Life happens (trust me it does) and obstacles will continually be thrown our way so we are unable to reach where we want to. With that said, what if we are unable to pay back these loans? The first things suggested is to contact the loan service provide as soon as possible. They are the professionals and can help you understand your options for keeping your loan in a good standing.
Can the PLUS Loan be cancelled?
Another scenario may be that before the funding is even disbursed, you may realize that you are not in need of the full amount offered. Before the money is sent you may cancel all or part of the loan. The parent will need to contact the student’s school. If the loan is already disbursed then you will need to cancel within certain time frames. This will all be explained more when completing the Master Promissory Note.
A common question is if the PLUS loan can be forgiven? Much like the other direct loans, a cancellation or forgiveness means that you are no longer required to repay a portion or all of your loan. You can contact your loan servicer to see if you qualify for loan cancellation or forgiveness. An application would then be submitted and reviewed for an approval or denial.
If approved, you are then no longer required to make payments on your loan. If only approved for a portion of the loan then you are responsible for repaying the balance. If denied, then you will remain responsible for repaying your loan according to the terms of the promissory note that you signed.
Parent PLUS Loan: A Hard Sell?
I’ve always viewed the PLUS loan as a “hard sell.” Some parents may be willing and that’s great. Then the next piece of the puzzle comes in and that is if the parent themselves meet the above requirements. Then you may have the parents that are unsure and may not want to borrow. That is where things get challenging as it may be your child’s only option for funding. The best thing we can do is do our research and then present said research to our parents.
Tuition Drop Podcast
Check out our episode below of the Tuition Drop Podcast on Parent PLUS Plans!