What is a PLUS Loan?
A PLUS loan is a type of federal loan that helps students supplement their financial aid. PLUS loans are intended to fill in the gaps where other sources of aid and family contribution fall short. PLUS loans can be used to pay tuition at qualifying universities, colleges, and career schools, and they can also be put towards other college expenses like room and board. A Parent PLUS loan is just one type of PLUS loan.
What Does PLUS Stand For?
The acronym, PLUS, stands for “Parent Loan for Undergraduate Students”. But because PLUS loans are now available to graduate students and not just parents, the acronym is largely defunct.
Direct PLUS vs Parent PLUS Loans
PLUS Loans are available to both graduate/professional students and the parents of dependent undergraduate students. (Undergraduate students cannot take out their own PLUS loans.)
Both cases are instances of “direct loans”, meaning they are issued directly by the federal government. A Parent PLUS Loan is the name given to these Direct PLUS Loans when they are taken out by parents on behalf of their undergraduate students. When they’re borrowed by professional or graduate students, these direct loans are referred to as Direct PLUS Loans, even though they don’t involve a parent.
Direct PLUS – Taken out by graduate and professional students without a cosigner.
Parent PLUS – Taken out by the parents of dependent undergraduate students.
Eligibility for Parent PLUS Loans
To be eligible for a Parent PLUS Loan, the parent must meet the following (studentaid.gov):
- Meet the general eligibility requirements for federal student aid.
- Pass a credit check OR do one of the following, and complete credit counseling, if you do not pass:
- Obtain an endorser (cannot be the student for whom you are taking out the loan).
- Provide satisfactory documentation of extenuating circumstances which led to your adverse credit check.
- Be the legal parent of an undergraduate student who is enrolled at least half-time in a participating institution.
Additionally, the student must meet the following:
- Meet the general eligibility requirements for federal student aid.
- Be enrolled as an undergraduate at least half-time in a participating institution.
How Much Can You Borrow with a Parent PLUS Loan?
The maximum amount you can receive with a Parent PLUS Loan is determined by the cost of attendance at your student’s school, as well as how much your student is receiving from other financial aid sources.
Parent PLUS Loan Interest Rates
The interest rate for Parent PLUS Loans disbursed between July 1, 2017 and July 1, 2018 is 7%. Interest rates for this type of loan are fixed, which means it won’t increase throughout the course of repayment.
When Parent PLUS Loans Are a Good Idea
Simply put, Parent PLUS Loans can be very useful and a great option—when used intelligently and with planning. Parent PLUS Loans can cover any remaining college expenses when no other funds are available. This makes them perfect for students whose scholarships, family contributions, savings, and other sources of aid don’t make ends meet.
When Parent PLUS Loans Are a Bad Idea
A Parent PLUS Loan can also quickly become a financial risk. As the parent taking out the loan, you are legally responsible for repayment. Many students and their parents who decide to take out Parent PLUS Loans come to an agreement that the student will take on loan repayment. However, students often fail to make payments, leaving their parents with a hefty financial burden and a possible dent to their credit score.
When Should You Use a Parent PLUS Loan?
Parent PLUS Loans should only be used to cover gaps in paying for college expenses, and only as a last choice. After grants, scholarships, work-study, out-of-pocket savings, and family contributions, you may still need loans to make up the difference. But before you take out a Parent PLUS Loan, your child should take out loans in their own name to cover as much of their college education as they can. If you are ineligible for a Parent PLUS Loan, your child may be able to obtain an increased subsidized loan.
Repaying Your Parent PLUS Loan
The legal borrower of any loan is responsible for the repayment of that loan. In the instance of Parent PLUS Loans, the responsible party is always the parent, (and their cosigner, if they have one). Even if the student themselves agrees to pay back the loan, the parent is legally responsible for ensuring repayment and is liable for any consequences that may come as a result of delinquency.
Parent borrowers are expected to begin repayment of their Parent PLUS Loans—generally—as soon as their loan is fully disbursed. This may vary, however, based on your child’s enrollment and deferment periods. You will receive a notice from your loan servicer when your first payment is due.
Parent PLUS Loan Deferment and Cancelation
The borrower of a Parent PLUS Loan can request deferment of their loan while their student is in school at least half-time, and for six months after they graduate or leave school. Interest will still accrue on the loan during periods of deferment.
If you decide to cancel your loan, you can do so before the money is disbursed by notifying your student’s school. Additionally, you can cancel all or part of your Parent PLUS Loan after the loan is disbursed, if you do so within a set time frame (this information will be provided on your promissory note).
Repayment Plans and Forgiveness
You can expect to have 10 to 25 years to repay your Parent PLUS Loan without penalty, depending on the type of repayment plan you choose. Direct Loans offer multiple repayment plans that can help ease the burden of high monthly payments. If you find yourself unable to repay your loan, contact your service provider right away. You may be able to request a lower monthly payment, a period of deferment, or forbearance. Parent PLUS loans are currently eligible only for standard, extended, graduated, and income contingent repayment plans. They are not eligible for IBR, PAYE, or REPAYE programs at this time.
Your Parent PLUS Loan may also be eligible for the Public Service Loan Forgiveness program and end of term forgiveness through the Income Contingent Repayment program (which is less generous than IBR or REPAYE). You could also qualify for Permanent Disability Discharge with a Parent Plus Loan.
Can You Transfer a Parent PLUS Loan to the Student?
Once your child graduates from college, you may wish to transfer the loan into their name, so that they can assume responsibility for repayment. However, this isn’t possible with Parent PLUS Loans. Once the loan is taken out in your name, it stays permanently in your name for the remainder of the repayment term.
If you wish to transfer responsibility to your student, you will need to consult with a debt consolidation professional. They may be able to help your student take out a new loan to pay off your Parent PLUS Loan, thus transferring the debt to the student. However, watch out for high interest rates, since your Parent PLUS Loan likely has a much lower interest rate than any private loan available to your student.
Are Parent PLUS loans eligible for consolidation or refinancing?
A parent may only consolidate their Parent PLUS loans with other loans that they have in their own name. They are not eligible to consolidate their PLUS loan with other loans taken out by the student as they have different borrowers. Parent PLUS loans are eligible to be refinanced.
Are there tax benefits for parents who take out PLUS loans?
Yes, parents who take out PLUS loans are allowed to deduct up to $2,500 per year in interest paid through the Student Loan Interest Deduction allowance on their tax returns (using IRS Form 1098-E).
Do I have to resubmit a new FAFSA every year?
Yes, in order to maintain your eligibility for a Parent PLUS loan and the many benefits it offers, parents are required to submit a new FAFSA every year.
How to Use Parent PLUS Loans—Safely
Although you undoubtedly accept a financial risk when you receive a Parent PLUS Loan, most parents are no stranger to financial risk when it comes to supporting their kids. If you’ve weighed the risks and benefits, and both you and your child understand the potential long-term, financial implications your Parent PLUS Loan will have, there is nothing wrong with using a Parent PLUS Loan to pay for college. Just make sure to explore your other options, first.