If the financial aid package you applied for isn’t going to cover the total cost of your child’s education, don’t panic. Parent PLUS loans, offered by the federal government, are specifically designed to help you fund your child’s education by borrowing money in your own name.
Here’s what you need to know about using Parent PLUS loans to finance your child’s undergraduate education, and paying them back if you already have them.
What is a parent PLUS loan?
Federal PLUS loans, also called Direct PLUS Loans or “parent PLUS” loans, carry the highest interest rate of all federal loans. But they can be an option for students who need to cover additional expenses at either the undergraduate or graduate level.
PLUS loans are available for both graduate students as well as parents of dependent undergrads and, unlike some other federal loans, you can take out all the PLUS loans you need to up to your school’s certified cost of attendance.
Sounds great right? Except that there’s a catch. If you must turn to PLUS loans because you’ve hit your limit on more affordable loans, you’ll pay a hefty interest rate on the money you do borrow — interest rates on new PLUS loans will be increased to 7.0 percent starting July 1, 2017. On top of that, PLUS loans carry a 4.3 percent up-front disbursement fee. Depending on the repayment plan you chose, that up-front disbursement fee means that the APR on PLUS loans issued after July 1 will be about 8 percent.
Before you turn to a federal PLUS loan, it might be worth considering competitive offers from private student lenders, who also offer student loans to undergrads, graduate students and parents.
Either way, it’s a good idea to do some research before deciding what loan is right for you. Let’s find out more about federal PLUS loans.
How to apply for a parent PLUS loan
In order to apply for a parent PLUS loan, you must first fill out the FAFSA, or the Free Application for Federal Student Aid.
The FAFSA may look long and intimidating but it’s really the easiest way to make sure you receive financial help to pay for your education. Filling out the FAFSA is totally free, and if you’re prepared, it’s also really easy.
Learn more about what you’ll need to fill out the FAFSA, and get some helpful tips here.
If you meet all the eligibility criteria for a Direct PLUS Loan, you will also be required to sign a Direct PLUS Loan Master Promissory Note (MPN), agreeing to the terms of the loan. Graduate or professional students must also complete entrance counseling if they haven’t previously taken out a PLUS loan.
You should also contact your school to request a Direct PLUS loan. Many schools will require you to do this online at studentloans.gov, but you should contact your school to make sure you know what their process for requesting a PLUS loan is.
If you are approved for a Direct PLUS loan, your school will use the loan to pay for expenses included in your cost of attendance. This typically includes tuition, room, board and books etc. If there is any money left over once your expenses have been taken care off, your school will give you the funds to use towards any other educational expenses. Learn more about how to receive your loan here.
PLUS Loans are available only to graduate or professional students who are enrolled at least half-time at an eligible school, or to parents of dependent undergraduate students who are enrolled at least half-time at an eligible school.
Before being approved for a loan, the borrower (you or your parents) will undergo a credit check to make sure they don’t have any red flags in their credit history.
Graduate students and parents seeking to take out federal PLUS loans may also need a cosigner if they have any adverse credit history within the last five years, such as bills that are more than 90 days overdue, or a bankruptcy or foreclosure.
Those who endorse a PLUS loan (the government’s term for a cosigner), cannot be released until the loan has been repaid in full. Servicers collecting payments on federal PLUS loans can use the same tactics against endorsers that they employ against the delinquent borrowers, including wage garnishment.
Interest rates and fees
Starting July 1, 2017, interest rates on PLUS loans will be 7.0%. For Direct PLUS Loans first disbursed on or after July 1, 2016, and before July 1, 2017, the interest rate is 6.31%.
And remember that PLUS loans also carry about a 4.3 percent up-front disbursement fee.
Interest rates on PLUS loans are fixed, which means they will remain the same over the lifetime of your loan. You can read more about fixed vs. variable interest rates here.
You can take out all the PLUS loans you need, up to the cost of attendance as determined by your school, minus any other financial aid you’ve received. PLUS loans can only be used to pay for expenses included in the annual cost of attendance at your school.
In addition to school tuition and fees, these expenses may include “room and board” (housing and food), books, supplies, transportation, and miscellaneous personal expenses.
5 options for paying off parent PLUS loans quickly
The standard repayment term for PLUS loans is 10 years, but you also have some other options. You can stretch your payments out over a longer period of time in a graduated or extended repayment plan, and graduate students taking out PLUS loans can enroll in income-driven repayment plans like IBR or PAYE.
Most income-driven repayment plans are closed to parents who take out PLUS loans. Parents who want to pay back PLUS loans in an IDR plan must first combine them into a federal Direct Consolidation Loan. That loan will then be eligible for Income-Contingent Repayment (ICR), the least generous of federal income-driven repayment plans. Borrowers in an ICR plan must make monthly payments equal to at least 20 percent of their discretionary income, compared to 10 or 15 percent in other IDR plans, and must make 25 years of payments before qualifying for loan forgiveness.
But don’t worry — you’re not completely out of options. With a PLUS loan, you can still change your repayment plan, defer your payments, or refinance your loan. Here are five ways to get your parent PLUS loans under control.
1. Change your repayment plan
While you may not qualify for one of the more generous income-driven repayment plans, you can still change your repayment plan to suit your needs, by switching from a standard 10-year repayment plan to a graduated or extended repayment plan.
- Graduated repayment plan: With the graduated repayment plan, payments start low (usually at or slightly above an interest-only payment) then gradually increase. The maximum repayment term is 10 years or up to 30 years for PLUS loans that have been rolled up into Direct Consolidation Loans. If you’re just getting started with work and prefer to start out paying less, this might be a good plan for you.
- Extended repayment plan: With extended repayment, your payments may be fixed or graduated. Monthly payments are lower with this plan, but you must have more than $30,000 in either Direct Loans or FFEL Program Loans to qualify. This plan allows you to extend your payment term up to 25 years. This means monthly payments are lower, but you will end up paying more overall in interest.
While these plans can initially offer you lower payments, the drawback of both of these options is that you will pay more interest over the life of the loan.
2. PLUS loan deferment and grace period
If you’re a graduate or professional student with a PLUS loan, you can take advantage of a grace period, which means you don’t have to make any payments while you’re enrolled in school at least half-time, and for an additional six months after you graduate or leave school.
If you’re a parent who took out a PLUS loan on behalf of a dependent undergrad, you must start making payments as soon as your loan is fully disbursed. In the circumstance that you’ll require additional time before you can start making these payments, you can request to defer payments while your child is enrolled at least half-time and for an additional six months after your child graduates or leaves school.
While deferment can give you a little more time to get your affairs in order (you are not required to make any payments during your grace period or deferment period), remember that interest on PLUS loans will continue accruing during this time.
You can choose to pay off just the interest or have the interest added to your payments (once you start making them.)
3. Refinance your parent PLUS loans
Just like with any other federal loans, you do have the option to consolidate your parent PLUS loans through the Direct Consolidation Loan program. But think twice about consolidating parent PLUS loans with other types of federal loans. A Direct Consolidation Loan that includes parent PLUS loans only qualifies for the least generous income-driven repayment plan, ICR (see above).
Refinancing is another option available to you — refinancing your parent PLUS student loan could get you a lower interest rate and potentially save you thousands of dollars.You can often qualify to borrow money at a significantly lower interest rate if you have a healthy income and credit history.
If you’re a parent who took out a PLUS loan, you can either refinance the loan in your own name or have your child take on the responsibility of repaying the loan by refinancing it in their name.
If you’re interested in transferring the loan to your child, keep in mind that your child must qualify for refinancing with the lender you choose to refinance with. Refinancing your PLUS loan in your child’s name lets you off the hook as the parent — however, you could also co-sign the newly refinanced loan with your child in order to help them potentially get a lower interest rate.
Remember, a Direct PLUS loan is a federal loan, which means it comes with certain borrower benefits, such as the option to defer payments. Not all private lenders offer the same borrower benefits, so while you’ll lose some of the federal perks like the ability to defer payment, refinancing can still be an attractive option.
Refinancing doesn’t have to be confusing or scary — learn more about how refinancing student loans can save you money.
4. Income contingent repayment
While parent PLUS loans aren’t eligible for income-driven repayment plans like income-based repayment (IBR), PAYE, or REPAYE, they do qualify for the income-contingent repayment plan (ICR).
*If you’re a graduate or professional student with a PLUS loan, you are eligible for any income-driven repayment plan.
ICR is helpful for those borrowers who are having trouble making their monthly payments since your minimum monthly loan payment is 20 percent of your discretionary income.
While opting for ICR can help you free up some additional cash and make your monthly payments more manageable, paying less each month will extend your repayment term (i.e. how long you will need to pay off your loan.) The interest on your loan will keep accruing during this time, so you might end up paying more in interest overall.
If you’re on an ICR plan, you can also qualify for loan forgiveness after 25 years of qualifying payments. But keep in mind that you’ll have to pay taxes on any amount that is forgiven under ICR.
To qualify for ICR you must first consolidate your loans into a Direct Consolidation loan. Parent PLUS loans are only eligible for ICR, and not any other income-driven repayment plans (IDR), so you will no longer be eligible for IDR if you consolidate your PLUS loans with any other loans that are eligible for IDR.
5. Public Service Loan Forgiveness
If you work in a public service field, such as in government or at a qualifying nonprofit, you might be eligible to have your federal student loan debt forgiven under the Public Service Loan Forgiveness (PSLF) program.
PLUS loans taken out by graduate students are eligible for Public Service Loan Forgiveness if the borrower works for the government or a qualified nonprofit. Parents who took out a PLUS loan may qualify for Public Service Loan Forgiveness if they — not the student on whose behalf the loan was taken out for — works for the government or a qualified nonprofit.
You’re eligible for PSLF after you make 120 qualifying payments, which takes at least 10 years.
The standard repayment term on PLUS loans is 10 years. So if you’re on a standard repayment plan, you might pay off your loan before qualifying for forgiveness. That’s why the Department of Education recommends that borrowers who hope to qualify for Public Service Loan Forgiveness enroll in an income-driven repayment plan.