If you thought Gucci and Prada were expensive, try graduating.
According to Education Data Initiativethe average American student pays $35,720 a year in college tuition.
While most students are eligible for some form of assistance, income and savings still play an important role in covering most of the academic expenses.
However, not every parent is able to help their children financially. That’s when applying for a Direct PLUS federal loan can come in handy.
What is a Parent PLUS loan?
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You must have heard about Direct subsidized and direct unsubsidized federal loansor at least saw them listed as part of your financial aid package in your school’s award letter.
But there is a third type of federal loan that is usually not included, and you can also use it if your parents agree.
This loan, my friends, is called the Direct PLUS loan.
In case you’re wondering, “PLUS” means PNo loan for Ugraduate WITHstudents, but this abbreviation like are obsolete as these credits have been available to graduate students since July 1, 2006.
Parent PLUS loans are a type of unsubsidized Federal Direct loan that your parents can take out on your behalf to pay for your tuition and living expenses.. These loans are usually used when other forms of assistance, including scholarships, grants, and other types of federal loans, are not enough to cover all the costs of attendance.
Unlike other types of federal loans, the federal loan PLUS requires a credit check for approval, as these loans have a higher borrowing limit.
They have a fixed interest rate which is currently set at 6.28%and can be repaid for a maximum of 30 years.
Who is eligible for a Parent PLUS loan?
According to the office Federal Student AidParent PLUS loans can be taken on your behalf by one of the following:
- your biological parents.
- your adoptive parents.
- your adoptive parents.
Grandparents and legal guardians can’t apply for PLUS credit – even if they raised you and support you financially – that is, if they did not adopt you.
To be approved for a PLUS loan…
- A parent borrower cannot have a bad credit history. (aka bad credit or credit card repayment history).
- Both you and your parents must demonstrate financial need.
- You must be a dependent undergraduate studentwho attending school at least part-time.
It is worth noting that even if your parents have poor credit history, they may still qualify for a PLUS loan if they can prove that the late payments were caused by extenuating circumstances.
They also have the option of asking someone to “approve” or sign a loan. An endorser cannot have bad credit and will be legally liable to repay the loan if your parents default.
Read more: What does it really mean to be a Cosigner?
What if my parents can’t prove extenuating circumstances or they don’t have a guarantor?
I’m glad you asked.
If so, they should still apply as there are benefits to being denied a PLUS loan.
It turns out that If your parents are denied a PLUS loan, the Department of Education will raise your annual federal loan limit to match the independent student limit.. This means you can receive between $4,000 and $5,000 a year in federal loans, depending on the school year.
How much can you borrow?
One of the benefits of a PLUS loan is that they allow your parents to borrow an amount equal to the certified cost of attending your school, minus other financial assistance received, including other federal loans.
Let’s say your cost of attendance this academic year is $30,000 and you received $4,000 worth of scholarships and grants. You are a college freshman, so you also received $5,500 in direct federal loans.
This means you received a total of $9,500 in financial assistance, so your parents can borrow up to $20,500 in PLUS loans.
Be careful not to take too much
Just because your parents are entitled to a certain amount doesn’t mean they are must Take it. Amy Lynn Richardson, CFP Schwab Intelligent Portfolios Premium, says it’s still very “important to set realistic expectations about your ability to repay these loans going forward.”
In other words, it’s best not to bite off more than you can chew.
Before taking out a loan, Richardson recommends that you sit down with your parents and find out what the starting salary range for your chosen career is, as well as early career earnings.
You can run these numbers with a payroll reporting website such as Pay scalewhich offers this information for free.
How to apply
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Each school has its own application process, but most will ask your parents to apply online for StudentAid.gov.
Here is a checklist of what they will be asked to provide during the application process:
- Validated FSA ID. This is a unique number that is assigned to them when they create an account on StudentAid.gov. This number is also used to complete the FAFSA.
- The name of your school. This way they can confirm the cost of the visit, which will determine your loan limit.
- Your personal information. Full name, permanent address, social security number, date of birth, and phone number.
- Their (your parents’) personal information. Permanent address, email and telephone.
- Information about their (your parents’) employer. Company name, phone number and address.
Filling out the application takes about 20 minutes, and this must be done in one session.
How PLUS Payout Works
Once the loan is approved, the funds are sent directly to your school so they can use it to pay for your tuition and fees.
What happens if there is money left after that?
There are two options: ie.The loan funds are sent to either your parents or you, depending on whether your parents allowed you to receive the remaining amount during the application process.
What to Consider before applying for a Parent PLUS loan
Megan Walterpolitical analyst National Association of Student Financial Aid Administrators (NASFAA) says PLUS loans can be a good alternative to taking private loans, primarily because of all the protection that PLUS loan borrowers receive.
Some of these include the ability to defer or withhold loans if they have financial problems, as well as eligibility for a loan. Public Service Loan Forgiveness if they work for a qualified employer.
Read more: Should I stick to public service loan forgiveness?
However, they also have some disadvantages that you should be aware of.
There is a shipping fee
The loan origination fee is the percentage that the lender charges on the total amount of the loan in order to process your loan.
All federal direct loans charge an origination fee. However, PLUS loans have an origination fee of 4.2%, which is four times the fee for direct subsidized and direct unsubsidized federal loans..
Walter says this means that if you filled out a $10,000 PLUS loan application, you would only receive $9,577.20 of that amount.
If you need all $10,000, that means you will need to borrow more than you originally thought to cover the loan fee without losing money.
Your parents could pay more interest
While PLUS loans require your parents to pass a credit check in order to be approved for a loan, the interest rate is the same for everyone, no matter how good their credit is. This is because interest rates on federal loans are set by Congress.
“If you are a borrower or guarantor with an excellent credit score, you can get private student loan at a much lower interest rate than the PLUS loan program offers, which can save thousands of percent in interest payments at the end of the loan term,” says Walter.
So, if your parents have excellent credit, it doesn’t hurt to compare rates from one or two private lenders to make sure they’re getting the best possible deal.
Repayment starts while you’re still in school
Unlike private student loans and direct subsidized and unsubsidized federal loans, which automatically defer your payments up to six months after graduation, repayment for parent borrowers PLUS begins as soon as the loan funds are repaid.
Your parents can request a payment deferral of up to six months after graduation or lower their half-time enrollment rate, but they must do so during the loan application process.
However, since Direct PLUS loans are a type of non-subsidized loan, interest will continue to accrue or accumulate during this time and eventually become part of the principal balance, making your debt more expensive.
They are not entitled to most income-based repayment plans
One of the benefits of using federal loans instead of private loans is access to income-based repayment planswhich allow you to lower your monthly payment based on how much you earn.
However, there are currently four types of income-based repayment plans: Parent PLUS loans are only eligible for one of these, which is the Income Based Repayment Plan (ICR Plan).. This plan adjusts your monthly payments up to 20% of your discretionary income.
Your parents’ finances and retirement age could take a hit
That debt to income ratio (DTI) it is a percentage that measures how much of your monthly gross income is compromised by your monthly debt payments.
If payments are on the higher side, your parents’ DTI will jump, making it harder for them to qualify for things like a mortgage or refinancing a loan.
Richardson of Charles Schwab also notes that obtaining such a loan may delay your parents’ retirement age, as they will need to keep earning the same amount or more to keep making payments and ensure their financial security..
PLUS credits cannot be transferred to you
“PLUS loans remain in the parent’s name for the life of the loan,” says NASFAA’s Walter.
So, even if you make payments after graduation, they will continue to affect your parents’ credit and finances for the life of the loan, unless you refinance them with a private lender.
But refinancing a PLUS federal loan also has its downsides, as both you and your parents will lose benefits such as eligibility for forgiveness and eligibility for an ICR plan that allows you to lower your monthly payment.
Summary
Parent PLUS loans can be a good alternative to student loans when other forms of assistance fail. However, applying for these types of loans should not be taken lightly as it is a decision that will impact your entire family financially.
That’s why it’s important that you exhaust all forms of assistance, including other types of federal loans, before you and your parents take the plunge.
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