Your child is going to college or career school—that’s great! But you may have questions about how to pay for it. If your child hasn’t completed the Free Application for Federal Student Aid (FAFSA®), ask your child to complete it today. Completing and submitting the FAFSA is free and quick, and it gives your child access to the largest source of financial aid to pay for college or career school, including loans YOU can receive.
After applying for financial aid, your child may receive an aid offer from the school that includes grants, federal work-study, scholarships, school and state aid, and federal student loans. Those federal loans may include a Direct PLUS Loan that you can get as a parent borrower. PLUS loans are an excellent option if you need money to pay your child’s education expenses, but you’ll want to make sure you understand the loan terms before you get one. Once you’ve taken out a PLUS loan, you must repay it, even if your child doesn’t complete their degree, can’t find a job related to their program of study, or if you or your child are unhappy with the education you paid for with your loan.
First, don’t assume the loan terms are the same as the federal student loans your child can receive. For a parent PLUS loan, you are expected to begin making payments on the loan immediately after you’ve received the last disbursement—while your child is still in school. (There is an option to defer making payments and you can read more about that later in this post.) Also, a PLUS loan cannot be transferred to the student later. You, the parent, are responsible for repaying the loan. There’s more.
The additional key differences between parent PLUS loans and federal student loans for student borrowers include eligibility, interest rates, fees, the first payment due date, and repayment plans.
The eligibility requirements are not the same. To receive a PLUS loan, you must
- be the biological or adoptive parent (or, in some cases, the stepparent) of the student for whom you are borrowing, and your child must be a dependent undergraduate student who is enrolled at least half-time at a school that participates in the William D. Ford Federal Direct Loan (Direct Loan) Program;
- not have an adverse credit rating* (a credit check is required);
- not be in default on any federal education loans and not owe an overpayment on a federal education grant; and meet other general eligibility requirements for the federal student aid programs.
*The credit check is completed as part of the application process. If you are found to have an adverse credit rating, you may still qualify for a PLUS loan, but there are additional steps you need to take first. If you are unable to get a PLUS loan, your child may be eligible for up to $4,000 in additional unsubsidized loans. You can contact the school’s financial aid office for more information.
The amount you can borrow in Direct PLUS Loans is generally more than the amount a student can borrow in federal student loans because you can use the loan to pay for education expenses not covered by other financial aid, which includes student loans. You can get a PLUS loan to make up the difference between your child’s cost of attendance and other aid referred to as “financial” or “unmet” need.
For example, if the cost of attendance (COA) at your child’s school is $25,000 for the school year and your child receives $15,000 in other aid, you can apply for a PLUS loan in the amount up of $10,000 or less.
If you do get a PLUS loan, it’s important to remember to borrow only what you need to for your child’s education expenses for the school year, and be sure to track the amount you borrow—loan balances can add up quickly. For instance, in the example above, if you were to borrow the maximum PLUS loan amount each year your child is enrolled, you could easily owe up to $40,000 in PLUS loans for one child (assuming your child is in school for four years). If you need help figuring out how much you’re eligible to borrow, contact your child’s school.
Interest Rate, Fees, and the Date Your First Payment Is Due
The interest rate, the fees, and the first payment due date for a Direct PLUS Loan for parent borrowers are not the same as the federal student loans your child may receive. Here’s a quick summary:
- Interest rates
The interest rate is determined annually for new loans that are made between July 1 of one year and June 30 of the following year. The current interest rate for Direct PLUS Loans first disbursed on or after July 1, 2018 and before July 1, 2019 is 7.6%. The rate is set by federal law.
You are charged a fee for each federal student loan you receive. The loan fee is a percentage of the principal amount of your loan. This fee is deducted before you receive any loan money, so the loan amount you actually receive will be slightly less than the amount you have to repay.
- First Payment Due Date
Generally, you’re expected to make payments immediately on your PLUS loan once it has been fully disbursed (paid out). However, you may request a deferment to postpone repayment until your child graduates, leaves school, or drops below half-time enrollment.
You don’t have to make any loan payments while your loan is deferment, but it’s a good idea to make (at least) interest payments during the deferment period because interest will still accrue on your loan. If you don’t make the interest payments, the interest will be capitalized (added to your loan principal balance) at the end of the deferment period, increasing the amount of interest you accrue and the total amount you owe.
There are fewer loan repayment plan options available to parent PLUS loan borrowers than there are available to student borrowers. For example, parent borrowers are eligible for one income-based repayment plan, the Income-Contingent Repayment (ICR) Plan, which bases your payments on your income, but only if you consolidate your loans into a Direct Consolidation Loan first.
The following repayment plans are automatically available for Direct PLUS Loans made to parents:
- Standard — You’ll have fixed monthly payments for up to 10 years.
- Graduated — Your payments will start off lower and then gradually increase, usually every two years. You must repay the loan in 10 years.
- Extended — Allows you to repay your loans over an extended period of time, which is likely to lower the amount of your monthly payment. You can choose to make fixed or graduated payments. To be eligible for this plan, you must have more than $30,000 in Direct Loan debt, and you must not have already had an outstanding balance on a Direct Loan at the time you received a Direct Loan on or after Oct. 7, 1998.
If you already have a federal student loan and you are currently repaying it under one of these plans, you may be able to lower your payment by consolidating your PLUS loan. Consolidating your loans may extend the length of your repayment period and lower your monthly payment. Your new repayment period could range from 10 to 30 years depending on the amount of your consolidation loan, your other education loans, and the repayment plan you select. But, proceed with caution because increasing the length of your repayment period may also require you to make more payments and pay more in interest.
When you consolidate your loans, you will become eligible for the ICR Plan. If you select the ICR Plan, your payments will be the lesser of the following:
- 20 percent of discretionary income, or
- the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income.
The ICR Plan also allows you to have the remaining balance on your loans forgiven after 25 years.
Yes, there’s a lot to consider when it comes to taking out a Direct PLUS Loan, but there are many benefits to getting one if you need help paying your child’s education expenses, including options if you are having trouble making your loan payments. Take some time to review the terms of your Direct PLUS Loan, and don’t hesitate to contact your child’s school with your questions. You’ll be glad you did!