Parent Plus Loan
The Parent PLUS Loan is a college loan issued to parents rather than students. In other types of federal student loans, the student takes on the loan. The loan repayment is the responsibility of the student. In the Parent PLUS Loan, the loan is in the parent's name, which makes the repayment responsibility the parents. The US federal government backs the loan.
Parents can borrow as much as the total cost of attendance at an approved college or university, minus any other financial aid received. Family income is not a consideration in obtaining this loan.
Why is it a good option?
This federal PLUS loan repayments begin six months after the student graduates or his or her enrollment falls below half time. This gives parents ample time to prepare for repayment of the loan. Once repayment starts, should the parents enter a period of financial difficulty, parents can apply for temporary payment relief through forbearance or deferment.
Other benefits include:
- No prepayment penalty: pay off the Parent PLUS Loan early to reduce interest costs without paying a fee to do so
- You may be able to use this federal PLUS loan as a tax deduction. This is dependent on the family's tax bracket and income. Talk to your tax professional about your qualifications
- Although these loans do require a credit check, approval is easier to obtain than other types of loans, including most private loans
- Loans are more accessible to some individuals than borrowing against their home or retirement plans
- Parents do not need to have substantial savings to pay for their child's education. For those parents who may not have been able to save to pay for their student's college education, the Parents PLUS Loan is a solution
Most parents will need to show proof they can repay the loan, such as having steady employment. However, this loan is less difficult to obtain compared to other types of college loans.
Potential Negative Aspects
Although there are benefits to this college loan, parents need to take into consideration a few negative aspects of this particular loan. Parents must determine if they can afford to take on the responsibility of their child's college education debt. Some parents may find it financially challenging to repay these loans. In some situations, it may be best for the student loan debt to be the child's responsibility. Some parents opt not to take on this responsibility. Instead, they may co-sign for a private student loan. With co-signing, the student remains the responsible party for repayment primarily.
In addition, Federal PLUS Loans can be expensive. They have a four percent origination fee. These loans accrue interest as well, which can become costly over time. For parents with a good credit score, some private loans may be available with a lower interest rate than what is available through this college loan.
Interest Rates on the Parent PLUS Loan
Interest on Federal PLUS Loans is 8.5 percent through a private lender. You may also obtain this loan through the Direct Loan Program. If so, the interest rate is a bit lower at 7.9 percent. In either case, the interest rate is fixed for the life of the loan.
Although this interest rate may be higher than some other loans, some parents find that there are still several benefits to selecting this particular type of offer over a private loan. The Parents PLUS Loan is a fixed rate, unlike many other loan offers with variable interest. Variable interest rates move up and down with the prime rate, which means your payment may adjust as well. Those without other opportunities for lower interest rates or home equity to borrow against, also find that the qualifications for he PLUS loan make this an ideal choice.
Credit Requirements for the Parents PLUS Loan
Those who apply for this federal PLUS loan will need a credit check. If you have negative marks on your credit report, such as bankruptcies, liens, back taxes or collections, the lender may turn you down. However, do not allow this to stop you from applying since lenders may approve your loan if you can demonstrate your ability to pay and give reasons for your negative credit conditions.
Should You Apply?
The Parent PLUS Loan is an ideal choice for most parents who wish to pay for their child's education with a fixed rate loan. However, this college loan is only one option. Parents should compare other types of federal student loans and private loans before making a decision.
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