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.
There are benefits and challenges to this kind of federal student loan that’s available to parents when their child is enrolled at least half-time at an eligible school.
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 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.
Recommended: Do You Have to Apply for a Parent Plus Loan Every Year?
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 for 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.
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 if they file an extenuating circumstances appeal or apply with a cosigner.)
Many low- and middle-income families that borrowed are in financial peril , according to The Hechinger Report, a nonprofit news organization.
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 within 60 days of the loan’s final disbursement, but in certain cases, parents can request a six-month deferment. Interest will still accrue during that time.
The Rate
The current interest rate for Direct PLUS Loans is 6.28% . (The rate has averaged over 7% from mid-2006 to mid-2021.)
Origination Fee
The government charges parents an additional fee of 4.228% of the total loan.
Relatively Fewer Protections
Borrowers 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.
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.
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.
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.
SoFi makes it fast and easy to apply to refinance Parent PLUS Loans (and for your children to apply to refinance their student loans, too).
SoFi also has led the way in issuing private student loans with no fees.
We’ve Got You Covered
SoFi Student Loan Refinance CLICK HERE for more information. Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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