What Are Parent PLUS Loans?

Parent PLUS Loans are federal loans that parents of dependent undergraduate students can use to help pay for their child's education. The "PLUS" stands for Parent Loan for Undergraduate Students. Unlike some other types of federal student loans, which are primarily taken out by students themselves, Parent PLUS Loans are strictly for parents.

These loans cover educational costs not met by other forms of financial aid, such as grants or student loans. They are designed to make up the difference between the cost of attendance and any other financial assistance the student has received, meaning they can potentially cover tuition, room and board, books, and other necessary expenses related to attending college.

Who Is Eligible for Parent PLUS Loans?

Eligibility for Parent PLUS Loans depends on a few key factors:

1. Parents

The borrower must be a parent of a dependent undergraduate student enrolled at least half-time at an eligible institution. Legal guardians or grandparents are not eligible unless they have legally adopted the child. A parent includes biological or adoptive parents and, in some cases, stepparents (if their financial information was reported on the Free Application for Federal Student Aid, or FAFSA).

2. Dependent Students

The student must be a dependent undergraduate enrolled at least half-time in an accredited institution. A student is typically considered dependent if they are under 24, unmarried, and do not have dependents of their own. For Parent PLUS Loans, students need to have filled out the FAFSA for the parent to apply.

3. Credit Requirements

Unlike some federal student loans, Parent PLUS Loans do require a credit check. Parents with an adverse credit history (defined as having debts 90 days or more delinquent, bankruptcies, foreclosures, or wage garnishments within the past five years) may have difficulty qualifying. However, if denied, parents can still potentially obtain the loan with a creditworthy cosigner or after providing documentation to the Department of Education that extenuating circumstances apply.

How to Apply for Parent PLUS Loans

The application process for a Parent PLUS Loan involves a few important steps:

1. FAFSA Submission

Before applying for a Parent PLUS Loan, the student must complete the FAFSA. This is a requirement for any federal aid and ensures that the student receives any available financial aid before parents consider taking out a Parent PLUS Loan.

2. Parent PLUS Loan Application

Once the FAFSA has been completed, parents can apply for a Parent PLUS Loan through the Federal Student Aid website. The application includes a credit check and basic financial information.

3. Master Promissory Note (MPN)

If approved, parents must sign a Master Promissory Note (MPN). This is a legal document in which the parent agrees to the terms of the loan and promises to repay it. The MPN outlines the borrower’s responsibilities and the interest rate for the loan.

Interest Rates and Fees

Parent PLUS Loans carry a fixed interest rate, which is set annually by the federal government. These loans typically have a higher interest rate than other federal student loans, such as Direct Subsidized or Unsubsidized Loans. However, they remain lower than most private loan options.

1. Fixed Interest Rates

The interest rate on Parent PLUS Loans is fixed for the life of the loan, meaning it will not change over time. The rate is determined annually, and loans disbursed between July 1st and June 30th of the following year will have the same rate. While interest accrues from the time the loan is disbursed, parents are not required to begin repayment immediately.

2. Loan Fees

In addition to interest, Parent PLUS Loans have an origination fee, which is a percentage of the loan amount and is deducted from each disbursement. This fee can change from year to year but typically ranges between 4% and 5%. Borrowers should account for this deduction when determining how much they need to borrow, as it will reduce the total amount disbursed to the school.

Repayment Options and Terms

Parent PLUS Loans offer several repayment plans, though they do not come with as many flexible options as federal student loans taken out by the students themselves.

1. Standard Repayment

The default option for repaying a Parent PLUS Loan is the Standard Repayment Plan, where the borrower pays a fixed amount each month for up to 10 years. This plan results in higher monthly payments but allows parents to pay off their loan faster and with less interest over time.

2. Graduated Repayment

The Graduated Repayment Plan starts with lower payments that gradually increase every two years. This option can be helpful for borrowers who expect their income to increase over time. However, the total amount paid in interest will be higher than under the Standard Repayment Plan.

3. Extended Repayment

The Extended Repayment Plan allows borrowers to extend the loan term to up to 25 years. Payments can be fixed or graduated, and this option can lower monthly payments but results in more interest being paid over the life of the loan.

4. Income-Contingent Repayment (ICR)

Parents who consolidate their Parent PLUS Loans into a Direct Consolidation Loan may become eligible for the Income-Contingent Repayment Plan. This option adjusts monthly payments based on the parent’s income and family size. Payments are typically set at 20% of discretionary income, with the remaining balance forgiven after 25 years. However, loan forgiveness may be taxable.

Deferment and Forbearance

Parent PLUS Loans offer deferment and forbearance options, allowing borrowers to temporarily stop making payments under certain circumstances. While these options can provide relief, interest will continue to accrue during these periods.

1. Deferment

Parents can request deferment while their child is enrolled at least half-time in college and for an additional six months after graduation. Deferment can also be requested for unemployment, economic hardship, or other qualifying situations. Although payments are paused, interest will continue to accumulate.

2. Forbearance

Forbearance is another option for borrowers experiencing financial hardship, illness, or other temporary difficulties. It is similar to deferment in that it allows for a temporary suspension or reduction of payments. However, interest will also accrue during this time, and the terms may be less flexible than deferment.

Loan Forgiveness

Parent PLUS Loans generally do not qualify for many of the loan forgiveness programs that are available to federal student loan borrowers. However, there are some options:

1. Public Service Loan Forgiveness (PSLF)

If a parent consolidates their Parent PLUS Loan into a Direct Consolidation Loan, they may become eligible for Public Service Loan Forgiveness (PSLF), provided they work full-time for a qualifying employer (such as government or non-profit organizations). After making 120 qualifying payments under an income-driven repayment plan, the remaining balance may be forgiven. It’s important to note that Parent PLUS Loans themselves do not qualify for PSLF; consolidation is required.

Pros and Cons of Parent PLUS Loans

Like any financial product, Parent PLUS Loans have advantages and disadvantages.

Pros

• Access to Funds: Parent PLUS Loans can cover the full cost of college attendance, filling the gap left by other forms of aid.
• Fixed Interest Rates: Borrowers can benefit from stable, fixed interest rates.
• Flexible Repayment Plans: While not as flexible as student loans, there are still several repayment options available.
• Eligibility: Most parents with an acceptable credit history are eligible.

Cons

• Higher Interest Rates: Parent PLUS Loans carry higher interest rates compared to student loans.
• Origination Fees: Borrowers must account for loan fees, which can reduce the total amount received.
• Credit Check Required: Not all parents will qualify if they have adverse credit.
• Repayment Responsibility: Parents, not students, are responsible for repayment, which can be a significant burden, especially with higher loan amounts.

Alternatives to Parent PLUS Loans

While Parent PLUS Loans can be helpful, there are alternatives that parents and students might consider.

1. Private Student Loans

Private loans, offered by banks and other financial institutions, may have lower interest rates, depending on the borrower's credit history. However, they may lack the flexibility and protections of federal loans.

2. Student Borrowing

Students themselves can take out Direct Subsidized or Unsubsidized Loans, which often have lower interest rates and more flexible repayment options than Parent PLUS Loans.

3. Scholarships and Grants

Students should explore every possible scholarship or grant opportunity, which does not require repayment and can significantly reduce the need for loans.

The Bottom Line

Parent PLUS Loans can provide a critical financial resource for families facing the rising cost of higher education. While these loans offer access to funds and repayment flexibility, parents should carefully consider the long-term financial responsibility, interest rates, and fees. It's essential to explore all financial aid options and make an informed decision based on personal financial circumstances and the student’s academic goals.