College is expensive.
For the 2019 to 2020 academic year, families reported paying an average of $30,017 on higher education expenses. Given the steep cost, it’s no wonder that parents need to borrow to help support their child’s educational endeavors.
If that’s you, you’re probably thinking about borrowing a Parent Plus Loan—a loan product designed for parents that are offered by the federal government.
Before you do, let’s take a look at what exactly a Parent PLUS loan is and some questions you should ask yourself before you borrow.
What is a Parent PLUS Loan?
The United States Department of Education (ED) offers Direct PLUS Loans to eligible parents through the college or university that their child is attending.
Only parents who meet the following criteria can receive Parent PLUS Loans:
- They’re the biological, adoptive, or step-parent (in some cases) of a dependent undergraduate student enrolled at least half-time in an eligible school
- Do not have an adverse credit history
- Meet all general eligibility requirements for federal student aid
Approved parents can borrow up to the full cost of attendance minus any financial aid their child receives. Repayment begins immediately upon disbursement, or parents can request a deferment while their child is in school.
Parent PLUS loans have a fixed interest rate. For loans first disbursed on or after July 1, 2020, and before July 1, 2021, the interest rate is 5.30%. All borrowers receive the same interest rate regardless of their credit score or income.
Parent PLUS loans also have a loan fee of 4.236%, so you’re borrowing more than what you can actually put toward your child’s education.
8 Things You Should Ask Yourself Before Borrowing a Parent PLUS Loan
Borrowing a Parent PLUS Loan might feel like the easiest way to cover your kid’s college costs, but it can be expensive too.
Before you borrow, ask yourself the following questions:
Is my child maxing out their financial aid?
It’s admirable that you want to pay for your kid’s college expenses but be smart with how you go about it.
Make sure that your child is maxing out all of their available financial aid. This includes state grants, federal grants, and scholarships, which don’t need to be repaid. It also includes Direct unsubsidized federal student loans and Direct subsidized federal student loans.
Federal student loans come with lower interest rates than Parent Plus loans. Direct undergraduate loans disbursed on or after July 1, 2020, and before July 1, 2021, have a 2.75% interest rate and a 1.057% loan fee. Those rates are significantly lower than Parent Plus loans.
Your child should max out their federal borrowing options before you take out a Parent PLUS loan. If you feel obligated to pay for their education, you can always help them with their loan payments. It’ll be cheaper than borrowing a Parent PLUS Loan on your own.
Am I eligible for Public Service Loan Forgiveness?
If you work for the government or an eligible nonprofit, you can apply for the Public Service Loan Forgiveness program after 120 on-time payments. The program forgives 100% of your Parent PLUS Loan. To make the debt eligible, you’ll need to consolidate your loan with a Direct Consolidation loan and then enroll in the Income-Contingent Repayment (ICR) Plan.
The ICR Plan sets your loan payment to the less of either:
- 20% of your discretionary income or
- “what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income”
If you’re eligible for this program, it might make your decision to borrow a bit easier. Just make sure you’re planning to work for at least 10 more years in public service.
Other Types of Parent PLUS Loan Forgiveness
It’s worth noting that Parent PLUS Loans are also eligible for permanent and total disability discharge and death discharge.
If the parent becomes permanently and totally disabled, they’re eligible to have the entire balance of their Parent PLUS loan forgiven. If the parent borrower or child who benefited from the Parent PLUS loan passes away, the loan might be eligible for a death discharge. In either case, the amount discharged is not taxable.
Have I considered my other borrowing options?
Don’t borrow a Parent PLUS Loan without first comparing it to other loan products out there. This includes private student loans and private parent loans. Private loans may not come with federal benefits like an income-driven repayment plan or loan forgiveness, but they might cost less to borrow.
Private Student Loans
You can cosign a private student loan for your child. Your child is the primary borrower, but as a cosigner, you’re still legally obligated to repay the debt.
However, some lenders—like CommonBond—offer cosigner release after a set number of on-time payments. That would release you from any financial responsibility. This isn’t a built-in option with Parent PLUS Loans.
Best of all, some of the best private student loans offer:
- No loan fees
- Flexible repayment terms
- Interest rates start as low as 1.12%
- No payments while the student is enrolled
- No prepayment penalties
- Grace period after the student drops below half-time status
- Death and disability discharge
- Forbearance during periods of hardship
Private Parent Loans
Some banks, credit unions, and financial institutions offer private parent loans. With this type of educational loan, the parent is the sole borrower. Interest rates are competitive, with rates as low as 3.50%, which is lower than the current Parent PLUS rate. And with the best lenders, you won’t owe any origination fees.
Do I have an adverse credit history?
If you have an adverse credit history, it’s likely your Parent PLUS Loan application will be denied. When that happens, you can only borrow if you successfully do one of the following:
- Obtain an endorser: An endorser agrees to repay the Parent Plus loan if you fail to repay it. Your endorser cannot have an adverse credit history. Your endorser cannot be the child that you’re borrowing the money for.
- Prove to the U.S. Department of Education (ED) that your adverse credit history is due to extenuating circumstances or is because of an error in your credit report.
You will also need to complete PLUS Credit counseling before your application is approved.
Can I afford to make the payments?
Don’t borrow more than what you can afford to pay back. Repayment for Parent PLUS loans begins immediately upon disbursement unless you request a deferment until after your child graduates. Of course, even that doesn’t guarantee you four years until repayment.
According to “The College Dropout Scandal” by David Kirp, 40% of college freshmen never graduate. Twenty-four percent drop out after their freshman year. If your student leaves school early, you’ll need to make payments on Parent PLUS loans sooner than expected.
Use our Student Loan Payment Calculator to determine your monthly loan payments. You can also plug in information about your income, marital status, family size, and state to see what those payments would be under the ICR plan.
What is the plan after my child graduates from college?
Sit down with your child and talk to them about how much it will cost for them to attend their chosen college. If you’re borrowing Parent PLUS loans, set clear repayment expectations with your child.
Legally, the parent borrower is financially responsible for the Parent PLUS loan payments. However, after graduation, many students refinance Parent PLUS loans in their own names.
If you expect your child to assume financial responsibility for the debt after graduation, tell them. Make sure they understand how much you’re borrowing, the interest rate, and what the monthly payment would look like. Just know that legally, they are not financially responsible for the debt until they refinance—if they choose to do so.
What’s the minimum amount I need to borrow and the maximum amount I can borrow?
When you apply for a Parent PLUS loan, the government only checks your credit score. No one looks at your debt-to-income (DTI) ratio. You don’t even have to list what other debts you have on your application. All the government looks for is a minimum credit score and a good credit history.
Along with that, Parent PLUS loans don’t have set borrowing limits. The school bases how much you can borrow on the total cost of attendance minus any other financial aid your child receives.
The total cost of attendance includes a lot more than just what your child actually owes for tuition, room, and board. It also includes estimates for books and other related educational expenses. In reality, the total cost of attendance is much higher than what a student ends up paying.
Before borrowing a Direct PLUS loan, figure out the minimum amount you need to borrow. Determine a maximum borrowing limit too. Ideally, when totaling up all of your debts, you want a debt-to-income ratio of 36% or less. Calculate your DTI by dividing your monthly debt payments by your monthly gross income.
If borrowing the minimum amount that’s needed will push your DTI up too high, you should give this next question extra consideration.
Can my child go to a different college?
Before deciding to borrow Parent Plus Loans, sit down with your child to see if going to another school will help you both minimize or avoid student debt altogether. It’s a hard conversation to have, especially if your child has their heart set on a particular school, but it’s an important one too. One that can save you—and your child—thousands of dollars and years of debt repayment.
Attending community college, enrolling in an online college, or commuting to a local college are all ways that your child can save money on their undergraduate education. Some students even defer for a year and take a gap year to save up money for college.
Final Thoughts On Borrowing Parent PLUS Loans
As of 2019, parents owe $89 billion in student loans, and the average Parent PLUS Loan balance is $25,600. That’s a hefty amount of money to pay back, especially if you’re planning to retire shortly. Make sure you carefully consider the financial ramifications of borrowing Parent PLUS Loans—or any loans—before sending in an application and accepting that first disbursement.
