What is a PLUS loan?

A PLUS loan, also known as a direct PLUS loan, is a federal higher education loan available to parents of undergraduate students, as well as graduate or professional students. PLUS stands for Parent Loan for Undergraduates. Like Federal Student Loans, PLUS Loans are offered through the US Department of Education’s William D. Ford Direct Federal Loan Program. The government itself is the lender, hence the name “direct” loans.

Understanding PLUS Loans

For their parents to be eligible for a PLUS loan, students must be enrolled at least part-time in a school that participates in the Federal Direct Loan Program.

The money from the PLUS loan goes first to the educational institution, which applies it to expenses, including tuition, accommodation and food, fees, etc. Any remaining funds go directly to the parent or student.

PLUS loans carry a fixed interest rate for their entire term. For example, loans disbursed on or after July 1, 2019 and before July 1, 2020 have an interest rate of 7.08%.

How to qualify for a PLUS loan

To apply for a PLUS loan, students and their parents must complete the Free Application for Federal Student Aid (FAFSA). The parent must also pass a standard credit check. Students preparing for a graduate degree or professional degree at an eligible school can also apply for PLUS loans on their own behalf. These loans are often referred to as PLUS graduate loans, as opposed to a PLUS parent loan.

For a Parent PLUS loan, the student must be a dependent of the parent – biological or adoptive – or, in some cases, a step-parent or grandparent. Parents and students must both meet general student aid eligibility requirements, such as being a U.S. citizen or permanent resident alien, and the parent must not have a credit history. If they do, they may still be eligible if they can get an endorser for the loan or indicate extenuating circumstances for their bad credit. When parents cannot qualify for a PLUS loan, their children may be eligible for student loans with larger limits.

Grad PLUS loans have the same eligibility requirements except that they apply only to the student.

Pros and Cons of PLUS Loans

Advantages

There are several major advantages of taking out a PLUS loan. First, the parent can borrow the full amount the student needs for their undergraduate education, minus any other financial aid they receive. This includes tuition, room and board, fees, books and other related expenses. In addition, the borrower does not have to demonstrate financial need to be eligible for the loan.

In addition, PLUS loans have fixed interest rates. The rate remains the same for the duration of the loan until it is fully repaid. So there is no threat of increased interest charges even when market rates rise. PLUS loan rates are relatively low, but not as low as student loan rates.

The inconvenients

One of the potential disadvantages of using PLUS loans is that parents are subject to a credit check. While you don’t necessarily need great credit to be approved, your credit report needs to be clean enough if you are to qualify. Those with poor credit may still qualify if they have someone to secure the loan.

Another downside to PLUS loans is that the government charges a fee, which is deducted from each disbursement and reduces the amount of money you actually receive. The fee for loans advanced on or after October 1, 2019 and before October 1, 2020 is 4.236%. This means that the fees for a loan of $ 25,000 would total $ 1,059. When it comes time to pay off the loan, you must repay the entire amount you borrowed, including these fees.

Finally, the parents are at all times responsible for repaying the PLUS loan. They cannot transfer it to their child, even if the child has the means to reimburse it. In addition, unlike a Sallie mae loan, parents will not be able to get their loan balance canceled if their child faces total permanent disability (PDT).

Loan repayment PLUS

Payment for a PLUS loan should generally begin after the entire loan has been disbursed. You can either start repaying your loans while the student is still in school or request a deferral. With a deferral, you won’t need to make any payments while the student is enrolled at least part-time or for an additional six months after the student has graduated, left school, or is passed below the half-time registration. However, interest will continue to accrue during this period and will be added to the loan balance.

The Department of Education offers several repayment plans for parent PLUS loans, including:

• Standard repayment plan. Under this plan, you make fixed monthly payments for up to 10 years. If you consolidate more than one Parent Plus loan, you can extend the repayment period up to 30 years.
• Progressive repayment plan. In this plan, you will also pay off your loan over a period of up to 10 years. But rather than being fixed, your payments will start out low and then increase every two years.
• Extended repayment plan. This plan, offered to borrowers who owe more than $ 30,000 in direct loans, allows you to repay your loans over 25 years, by making fixed or progressive payments.

In the case of grad PLUS loans, borrowers may have additional options including income-based repayment plans that base their monthly payment on their income and family size. Typically, PLUS graduate borrowers have 10 to 25 years to repay their loans, depending on the repayment plan they choose.