When an undergraduate’s financial aid doesn’t meet the cost of attendance at a college or career school, parents may take out a Direct PLUS Loan in their name to bridge the gap.
These loans are available to parents when their child is enrolled at least half-time at an eligible school. Before you apply, it’s important to understand the benefits and challenges of this kind of federal student loan.
A “Direct” Difference
First, to clarify, there are federally funded Direct Loans that are taken out by students themselves. Then there are federally funded Direct PLUS Loans, commonly called Parent PLUS Loans when taken out by parents to help dependent undergrads.
To apply for a Parent PLUS Loan, students or their parents must first fill out the Free Application for Federal Student Aid (FAFSA®).
Then a parent typically applies for a PLUS Loan on the Federal Student Aid site. A credit check will be conducted to look for adverse events, but eligibility does not depend on the borrower’s credit score or debt-to-income ratio.
💡 Quick Tip: Some lenders help you pay down your student loans sooner with reward points you earn along the way.
Pros of Parent PLUS Loans
At least 3.5 million parents (and in some cases, stepparents) have taken out Parent PLUS Loans to lower the cost of college. Here are some upsides.
The Sky’s Almost the Limit
The government removed annual and lifetime borrowing limits from Parent PLUS Loans in 2013, so parents, if they qualify, can take out sizable loans up to the student’s total cost of attendance each academic year, minus any financial aid the student has qualified for.
Fixed Rate
The interest rate is fixed for the life of the loan. That makes it easier to budget for the monthly payments.
Flexible Repayment Plans
The options include a standard repayment plan with fixed monthly payments for 10 years, and an extended repayment plan with fixed or graduated payments for 25 years.
More College Access
PLUS Loans can allow children from families of more limited means to attend the college of their choice.
Loan Interest May Be Deductible
You may deduct $2,500 or the amount of interest you actually paid during the year, whichever is less, if you meet income limits.
Recommended: Are Student Loans Tax Deductible?
Cons of Parent PLUS Loans
Many Parents Get in Too Deep
The program allows parents to borrow without regard to their ability to repay, and to borrow liberally, as long as they don’t have an “adverse credit history.” (If they did have a negative credit event, they may still be able to receive a PLUS Loan by filing an extenuating circumstances appeal or applying with a cosigner.)
The average Parent PLUS borrower has more than $29,000 in loans, a financial hardship for many low- and middle-income families.
And if a student drops out, parents are still on the hook.
Interest Accrual
PLUS loans are not subsidized, which means they accrue interest while your child is in school at least half-time. You’ll need to start payments after 60 days of the loan’s final disbursement, but parents can request deferment of repayment while the student is in school and for up to 6 months after. Interest will still accrue during that time.
The Rate
The current interest rate for Direct PLUS Loans is 8.05%
Origination Fee
The government charges parents an additional fee of 4.228% of the total loan.
Fewer Repayment Options
Parents who struggle with payments typically have access only to the most expensive income-driven repayment plan, which requires them to pay 20% of their discretionary income for 25 years, with any remaining loan balance forgiven. And parents must first consolidate their original loan into a Direct Consolidation Loan.
Options to Pay for College
Instead of PLUS Loans, private student loans may be used to fill gaps in need.
Private lenders that issue private student loans typically look at an applicant’s credit score and income and those of any cosigner. The lenders set their own interest rates, term lengths, and repayment plans. Some do not charge an origination fee.
You may want to compare annual percentage rates among lenders, and decide if a fixed or variable interest rate would be better for your financial situation.
Any time a student or parent needs to borrow money for education, a good plan is a good idea.
Sometimes scholarships can significantly reduce the amount of money that needs to be paid out of pocket for college, and personal savings and wages can also help. But it isn’t unusual for students to also need to take out loans.
💡 Quick Tip: Parents and sponsors with strong credit and income may find much lower rates on no-fee private parent student loans than federal parent PLUS loans. Federal PLUS loans also come with an origination fee.
Refinancing a Parent PLUS Loan
The goal of Parent PLUS Loan refinancing is to get a lower interest rate than the federal government is charging.
And student loan refinancing may allow children to transfer PLUS Loan debt into their name.
Refinancing could potentially lower your interest rate, which gives you the option to either:
• Reduce your monthly payments
• Pay the loan off more quickly, which may allow you to pay less interest over the life of the loan
Note that Parent PLUS Loans come with certain borrower protections, like the income-based repayment option and Public Service Loan Forgiveness, that you would lose if you refinanced. Also note that if you refinance with an extended term, you may pay more interest over the life of the loan.
Eligibility for refinancing Parent PLUS loans depends on factors such as your credit history, income, employment, and educational background.
The Takeaway
Millions of parents have used federal Parent PLUS Loans to help pay for their children’s college education. Anyone tempted to take out one of these loans may want to know the pros, cons, and options.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
SoFi private student loans offer competitive interest rates for qualifying borrowers, flexible repayment plans, and no fees.
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About the author
Julia Califano
Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.
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