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While savings, scholarships, grants, work-study and student loans can help cover a lot of undergraduate expenses, there might still be a shortfall. A Parent PLUS loan can help make up the difference.
Parent PLUS loans are federal student loans offered by the U.S. Department of Education under the Direct Loan program. Unlike most student loans, these are issued to a parent, or sometimes a stepparent, of a dependent undergraduate student. You can borrow as much as you need to cover the difference between the school’s estimated cost of attendance and the financial aid offered to your child.
Parents, not students, take out the loan
One of the most important things for parents to remember about taking out a Parent PLUS loan is that you — not your child — will be legally responsible for repaying the debt. The student can’t cosign the loan, and you can’t transfer the loan directly to your child.
You might be able to transfer the responsibility at a later date if your child refinances the debt with a private student loan lender. The student may need a low debt-to-income ratio and strong credit to qualify, and the new private student loan won’t qualify for federal repayment plans or forgiveness programs you could take advantage of with the Parent PLUS loan.
Some families create an informal agreement where the child pays the parent, who then makes the loan payments.
In other words, your agreement with your kid may not hold up with the reality of the situation.
We’ll discuss some options below if you’re having trouble repaying the loan, but first, here’s a little more about how Parent PLUS loans work.
The basics of PLUS loans
To be eligible for a Parent PLUS loan, your child must be enrolled at a qualifying school and take at least a half-time course load. You and your child must also meet the basic eligibility criteria, such as demonstrating financial need and being a U.S. citizen or eligible noncitizen.
You’ll also have to fill out and submit the Free Application for Federal Student Aid, or FAFSA, which you can now fill out and submit as early as October 1.
Schools have different application processes for Parent PLUS loans. You’ll either be able to request the loan from StudentLoans.gov, or you may have to check with the school’s financial aid office for information on their process.
As with private student loans, Parent PLUS loans require a credit check. Your application might be denied if you have an adverse credit history as defined by the Department of Education. For example, you can’t have charged-off accounts, accounts in collections or a 90-plus-day delinquent account with a combined balance of $2,085 or more.
You could also get approved if you have an endorser who doesn’t have an adverse credit history and you’ve completed PLUS credit counseling. The endorser takes a similar role to that of a cosigner and will be responsible for repaying the loan if the borrower doesn’t.
If your application is denied based on your credit, and you can’t, or don’t want to, get an endorser or appeal the decision, your child could become eligible for an additional $4,000 to $5,000 worth of Direct Unsubsidized Stafford loans.
If you’re approved for a Parent PLUS loan, you can review and officially agree to the loan’s terms by signing a Direct PLUS Loan Master Promissory Note, also known as an MPN. The money is generally sent straight to the school to pay for tuition, fees, room and board. If there’s money left over, you can choose to have the school send you, or, with your permission, your child, a check.
As with some other types of federal student loans, PLUS loans have a fixed interest rate that depends on when the money gets sent out. PLUS loans disbursed after July 1, 2017, and before July 1, 2018, have a 7 percent interest rate.
The loan fee for PLUS loans is higher than that for direct subsidized and direct unsubsidized loans. You’ll have to pay a 4.264 percent fee (versus 1.066 percent) for loans disbursed after Oct. 1, 2017, and before Oct. 1, 2018. It’s slightly lower than for loans disbursed during the previous year. The Department of Education automatically deducts the fee from the loan amount.
Repaying Parent PLUS loans
You’ll typically need to start paying back your PLUS loan as soon as the loan is fully paid out, or you can apply to have the payments deferred for up to six months after your child graduates.
You don’t have to make payments during deferral, but interest will accumulate and get added to the principal when you start making payments. From that point on, the interest rate will apply to your new principal rather than the original amount you borrowed.
Because PLUS loans are federal student loans, you may be able to take advantage of some federal loan programs and policies.
- Alternative repayment plans: As a Parent PLUS loan borrower, you won’t qualify for most income-based repayment plans. However, you may qualify for the Income-Contingent Repayment Plan if you consolidate your Parent PLUS loans into a direct consolidation loan.
- Deferment and forbearance: You may be allowed to temporarily stop making payments and put the loan into deferment or forbearance during periods of unemployment, economic hardship or other extenuating circumstances. The Parent PLUS loans will continue to accrue interest during this time.
- Discharge if you’re permanently disabled, you die or the student dies: A bit morbid, but it’s good to know that you won’t have the debt to worry about during a time of crisis, and any remaining debt won’t be passed on to your estate.
- Discharge under some other circumstances: The loan, or part of the loan, could be discharged if the school closes before your child completes their studies or if your child withdraws and the school doesn’t pay the required refund.
The Department of Education issues Parent PLUS loans to parents, not students, and you’ll be responsible for the repayment of the loan.
Federal student loans offered directly to students may have a lower fee and interest rate than a PLUS loan, but if there’s still a gap in funding, consider a PLUS loan to fill it.