What is a Parent PLUS loan?

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What is a Parent PLUS loan?

By LOUIS DENICOLA

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 (DOE) under the Direct Loan program. Unlike most student loans, these are issued to a parent, or sometimes 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 to remember about Parent PLUS loans is that if you take one out, you'll be legally responsible for repaying the debt. The student can't co-sign 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. He or she 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.

Some families create an informal agreement where the child pays the parent, who then makes the loan payments. However, Joshua Cohen, an attorney in West Dover, Vermont, who specializes in student loan debt, says that parents need to keep in mind "there is no guarantee the child will get a job that pays enough to make the payments."

In other words, your agreement may not hold up with the reality of the situation.

We'll discuss some options if you're having trouble repaying the loan below, 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 (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 DOE. For example, you can't have charged-off accounts, accounts in collections and 90-plus day delinquent accounts with a combined balance of $2,085 or more.

You may be able to appeal the denial if your negative credit history is based on extenuating circumstances (StudentLoans.gov lists some examples) and you complete credit counseling. You could also get approved if you have an endorser who doesn't have an adverse credit history. 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 (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 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 June 30, 2016, and before July 1, 2017, have a 6.31 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 4.276 percent fee (versus 1.069 percent) for loans disbursed after Sept. 30, 2016, and before Oct. 1, 2017. It's slightly lower for loans disbursed during the previous year. The DOE 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 until 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 (ICR) 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 his or her studies or your child withdraws and the school doesn't pay a refund.

Bottom line

The DOE 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.

About the Author: Louis DeNicola is a personal finance writer and educator. In addition to being a contributing writer at Credit Karma, you can find his work on MSN Money, Cheapism, Business Insider and Daily Finance. When he's not revising his budget spreadsheet or looking for the latest and greatest rewards credit card, you might spot Louis at the rock climbing gym in Oakland, California.

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