Navigating the college process with your child and figuring out how to pay the cost can be a stressful time for your family. It can get even worse when financial aid and loans don’t cover all your expenses.
For example, many students accept smaller student loans or earn partial scholarships, but these don’t always cover the complete cost of tuition and other expenses. Thus, families are left with a gap to fill.
Knowing your options and the facts behind those options can help ease this burden.
The Parent PLUS Loan could be your answer to filling this gap. In this article, I’ll discuss the ins and outs of this type of loan, so you can determine if it’s right for you. And I’ll show you how a Parent PLUS Loan can potentially give you the money you need to help cover your student’s full college costs.
Below are some of the basics about the Parent PLUS Loan to get you started:
The PLUS Loan is a loan from the U.S. federal government.
This loan is issued to the parent. Students aren’t involved with this loan, and there is no way to transfer this loan from the parent to the student in the future.
Virtually any parent can receive a PLUS Loan as long as they can pass a basic credit check. Please note that parents with poor credit, bankruptcies, and 60- or 90-day late bills may have difficulty getting approved for this loan.
PLUS Loans are available at nearly all two- and four-year colleges.
The maximum amount that can be borrowed is the total cost of attendance for the college you’re attending, minus any other aid and loans a student receives.
It automatically fills the gap between the financial aid and other loans you have and the total money you need for a specific school. Additional money shouldn’t be necessary once a PLUS Loan is obtained.
Interest for Parent PLUS Loans is reasonable and is currently 7.08%. While some families with very strong credit or the ability to use home equity or mortgages may be able to obtain an even better interest rate elsewhere, other families with average credit may find the Parent PLUS Loan to be the best option.
Many parents use this loan because of reasonable rates and favorable terms.
Payments may be deferred until after the student graduates.
Now that you have a background to the Parent PLUS Loan, let’s jump into 9 key points you should know about this loan.
1. PLUS Loans Can Be Stacked Onto Direct Loans.
A PLUS Loan can be stacked on top of a Direct Student Loan to make up the difference in the amount needed for total college expenses.
Direct Student Loans are often the first type of loan that students take to help pay for college. They are generally borrowed first because the interest rates are better than they are with PLUS Loans (even if parents plan to pay off the student’s loans).
Direct Loans are issued to the student from the government, and the parent is not involved. However, if a student still needs more money for college, parents can potentially borrow additional funds by using a PLUS Loan.
PLUS Loans are from the U.S. federal government and are available at nearly every two-year and four-year college. These loans are issued to the parent, and students are not involved. There’s also no way to transfer this loan from the parent to the student in the future.
Virtually any parent can receive a PLUS Loan as long as they can pass a basic credit check. But parents with poor credit, bankruptcies, and 60- or 90-day late bills may have difficulty getting approved.
If parents have poor credit and do not qualify for a Parent PLUS loan, students may receive an additional $4000 each year from their Direct Student Loan. This additional $4000 from the Direct Student Loan would be unsubsidized, which means that interest is applied immediately.
When borrowing PLUS Loans, a parent will typically acquire a loan for each year their student is enrolled in college. Since interest rates change from year to year, each loan will likely have a slightly different interest rate. The interest rate will reflect the current rate for that school year, but it will not change for the duration of that particular loan.
Parent PLUS Loans are all unsubsidized, which means that interest accrues throughout the life of the loan, even while a student is in college. While repayment does not begin until six months after the student graduates, interest will still accrue while they’re in school.
In contrast, Direct Loans can be subsidized, which means the government pays the loan interest while the student is in college. Some students qualify for a portion of their Direct Loans to be subsidized, but parents don’t have this option with PLUS Loans.
Table A shows the amounts students are allowed to borrow for each year of college with their federal Direct Loan. These amounts are without the additional $4000 discussed above.
Direct Loan Limits for Dependent Students
|Total Aggregate Limit||$31,000||$23,000|
You can see that this may not be enough money if this is the only aid a student receives. This is why you may consider stacking a PLUS loan on top of the Direct Student Loan.
However, while PLUS Loans are helpful, they still may not be not enough to cover the remaining costs for each year, and additional loans may be required.
2. Interest Rates
Parent PLUS Loan Rates are generally reasonable, and current interest rates are at historic lows due to COVID-19’s impact on the economy. PLUS Loan rates for 2020-21 are 5.30%, which is major drop from the 2019-20 rate of 7.08%.
Parents will often take out a PLUS Loan for each year their student is enrolled, and rates for new loans usually change from year to year. If you take out additional loans in the future, always make sure to check the current rates.
The example in Table B shows the year-by-year interest rates for parents who had children starting college in 2017 and took a PLUS Loan each year.
|Year in College||Interest Rate|
|2017-18 freshman year||7.00%|
|2018-19 sophomore year||7.60%|
|2019-20 junior year||7.08%|
|2020-21 senior year||5.30%|
The huge drop for the 2020-21 school year is an anomaly due to COVID-19, and the rate changes between the first three years are more typical of what you can expect.
Although these are favorable rates, some parents with excellent credit may be able to get better rates with other loans.
3. Parent PLUS Loan Benefits
Next, let’s take a look at the benefits of Parent PLUS Loans and why you might consider them:
Parent PLUS Loans can provide additional funds to help pay for college, especially when current savings, income and student Direct Loans aren’t enough to cover all your costs.
Parent PLUS Loans may have the best interest rates for parents with marginal or average credit.
The amount a parent may borrow may be even more than their income demonstrates, which is beneficial when the money is needed (however, this can be a problem when the loan needs to be paid back).
Parents can defer payments until after their son or daughter’s college graduation.
Parent PLUS Loans provide disability and death benefits. Also, if the college your student is attending permanently closes and ceases to exist, PLUS Loans may be discharged as well.
These benefits are not offered with many other non-federal loans.
4. The Process for Getting a PLUS Loan
If the Parent PLUS Loan sounds like a good option for you, you’ll need to learn the steps to apply for this loan.
First, take note that this loan is typically finalized after your son or daughter’s high school graduation. You’ll choose your loans and complete the paperwork just before your kids go off to college.
If you understand how the process works early in your child’s high school years, you can incorporate it into your plan during their senior year of high school, when the financial aid process happens.
Here are the steps to receive a Parent PLUS Loan:
Complete and submit the FAFSA (Free Application for Federal Student Aid). Most families will have completed the FAFSA as part of the financial aid process, and many people file the FAFSA just to take advantage of federal loan programs.
If you have not filed a FAFSA, you still can. Families have even filed their FAFSA for a school year that’s almost over, to go back and take loans. The FAFSA can be filed until June, which is 1 year and 9 months after it opens.
Get your financial aid award notification. Colleges will notify the student and parents of any financial aid awards they’re eligible to receive at their college.
Awards can include some or all of the five federal financial aid programs, other federal programs, state programs, and scholarships that are directly from the college. The PLUS Loan may be included in the mix, but not always.
The award notification is usually made in the spring of the student’s senior year, and PLUS Loans may or may not be listed on the award letter.
Parents may still receive a PLUS Loan if it’s not listed on the award letter. You can do this by working with the college’s financial aid office.
Choose your school. Your student will choose their preferred school, and once this happens, they’ll begin working with its financial aid office on the remainder of the process. Parents will also work with this office for PLUS Loans and should direct any questions there.
Complete and submit a separate PLUS Loan application. Most schools will have their PLUS Loan application process on their website or in the student portal. Students and sometimes parents have a username and password to a secure website where the college tracks financial aid, applications, transcripts, loan documents, bills, payments, course registration, etc. You may also contact the school’s financial aid office to verify their requirements for applying for a PLUS Loan.
Complete your PLUS Loan application. You’ll fill out loan paperwork for the school the student is attending in June or July, usually on the college’s online portal. This paperwork will include a master promissory note for the parent to sign, agreeing to the terms of the loan.
Find out your interest rate. The government will announce the interest rate for the upcoming school year on July 1st.
Get your money. The government directly pays the college, and the college deducts the loan amount from the tuition bill (see Receiving Your Money immediately below).
Now that you know how the PLUS Loan process works, let’s take a look at the details on how you’ll receive your money.
5. Receiving the Money
PLUS Loan money is sent directly to the college and not to the student or family. The college will generally apply one-half of the amount to each semester or one-third to each trimester.
If there is money left over after the loan is applied to the student’s college bills, parents must authorize what will be done with the extra cash.
Parents have two options for receiving any extra money:
- Parents can request to receive the money themselves.
- Parents can have the money disbursed to the student so the student can pay for other expenses such as books, rent, pizza on Friday nights, etc.
6. Qualifications for Receiving a Parent PLUS Loan
There are three basic requirements for obtaining a Parent PLUS Loan:
1. A parent must be the biological or adoptive parent of a dependent undergraduate student, who will be enrolled at least half-time at a participating school.
Grandparents and legal guardians are not eligible for PLUS Loans unless they have legally adopted the student.
2. You must meet some of the basic requirements for receiving federal aid, including possessing a valid Social Security number and the student maintaining satisfactory academic progress (see academic progress below).
3. The parent applying for the loan should not have poor credit history, although there are alternatives for parents who fall into this category.
Below are examples of what a parent with poor credit can do to still be considered for a PLUS Loan or additional funds:
- A parent with poor credit history can obtain an endorser. The endorser should not have poor credit history, and the endorser can’t be the student for which you’re borrowing.
- A parent may also provide documentation that there were extreme circumstances resulting in their poor credit history. This documentation must be approved by the U.S. Department of Education.
7. Satisfactory Academic Progress Requirements
A student’s satisfactory academic progress is necessary to continue receiving federal student aid or loans.
Each school has its own policy for satisfactory academic progress. This policy may be found on the school’s website, or you may speak to someone in the school’s financial aid office to learn more.
Schools generally look at the following criteria when determining academic progress:
- A minimum GPA must be maintained.
- The student must successfully complete a minimum number of credits by the end of the academic year.
Your son or daughter’s school can inform you about how often it evaluates their progress and what will happen if they fail to meet satisfactory academic progress requirements.
Some schools may allow you to appeal a decision regarding academic progress if the student had a circumstance such as illness or a death in the family.
8. When You’ll Make Your Payments
There are several key points you’ll want to know about making payments, which are listed below:
1. Payments may be deferred until after your son or daughter’s graduation.
You must request this deferment when applying for the loan. There is an option on the application for payment deferment, and if you don’t request a deferment, payment is expected as soon as the loan is disbursed.
2. Payments will begin six months after the student graduates if a deferment has been requested. This can be helpful if you plan on having your son or daughter assist with payments. It will give them a little time to get established in their career before making payments.
Payments will also begin after six months if the student leaves school or drops below half-time enrollment.
3. You will be contacted by a loan servicer, to whom you’ll make your loan payments. The loan servicer collects payments on behalf of the U.S. Department of Education and will provide updated reports pertaining to the status of the PLUS Loan.
4. Payments can be further deferred if the student continues with full-time student status such as grad school, a second major, and medical or law school. The loan servicer can be contacted for paperwork to continue deferment for any of these scenarios.
5. Parents may consolidate all of their PLUS Loans.
Consolidation is common because it combines multiple smaller loans into one big loan that’s easier to manage and often brings down your minimum payment.
The interest rate is averaged for a consolidated loan.
Consolidation may be combined with a repayment plan.
Consolidation is usually done just prior to or during repayment (typically after graduation).
6. Students may assist with payment, but the loan is ultimately in the parent’s name and is the parent’s responsibility. This loan will show up on the parent’s credit report.
7. PLUS Loans are eligible for four types of repayment plans. The options are as follows:
Standard Repayment. Monthly payments are higher under this plan, but the loan is paid off quicker, allowing you to pay the least amount of interest overall. If you don’t select a payment plan when repayment begins, the loan servicer will automatically place you on this standard plan.
Graduated Repayment. This plan starts with lower payments that increase every two years. Payments are made for 10 years. Consolidated loans are paid off between 10 and 30 years.
This plan is beneficial if your income is presently low, but you anticipate a steady increase over time—or, once again, if you plan on having the student assist you with making payments, allowing your student time to obtain employment.
Extended Repayment. Payments are lower under this plan, but they are made over a longer, extended period of time. Payments are made for up to 25 years under this plan.
Income-Dependent Repayment. Parents must consolidate their PLUS Loans to qualify for this plan. Under this plan, monthly payments are set at an amount that is determined to be affordable for you based on your income and family size.
BONUS SECTION: More on Income-Dependent Repayment
While there are several income-driven repayment plans for federal loans, the only one for which PLUS Loans qualify is the following:
- Under this plan, monthly payments will be the lesser of either one of the following: 20% of discretionary income or the amount you would pay on a repayment plan with a fixed payment over 12 years. And it is adjusted according to your income.
- Payments are recalculated every year and are determined by your updated income and family size.
- Outstanding balances will be forgiven if the loan is not repaid in full after 25 years.
- Parents must certify their income and family size to their loan servicer each year, even if there has not been a change.
- If there is a significant change within the year, such as the loss of a job, parents may submit this information at the time this change takes place. Their payment will then be re-evaluated, and they will not have to wait until the year ends
8. PLUS Loan repayment decisions can be made when repayment begins based on your current situation, and borrowers can often change their repayment plan choice if they need or want to. The worst case is the default 10-year repayment option if circumstances change a lot.
It may not be helpful to worry too much about repayment options and decisions until you get to that point and you have all the facts and options in front of you.
9. PLUS Loan Fees
TThe current fee for a Parent PLUS Loan is 4.236%. This is a percentage of the loan amount and is deducted from each loan that’s disbursed.
For example: if you request a $10,000 PLUS Loan, only $9576.40 is received by the school. The rest is deducted for fees.
$10,000 * 4.236% = $423.60 in fees
$10,000 – $423.60 = $9576.40
The benefits of PLUS Loans, discussed in detail in section 3 above, are not offered in many non-federal loans, so they often make this fee worthwhile.
Your Next Steps
Hopefully now you know enough about Parent PLUS Loans to decide if these loans would be helpful to your family when planning for college. Knowing your options is crucial in making these important decisions and also gaining a little peace of mind.
If you have any further questions, feel free to leave a comment below or contact me now.
You can also find other helpful college planning articles and resources by checking out the following links and recommendations:
Statistics and details from this article can be found at https://studentaid.ed.gov