Understanding Parent PLUS Loans: A Guide for Parents of College Students
As a parent, you want to do everything you can to support your child's education. College is expensive, and many families find that financial aid and scholarships aren't enough to cover all the costs. That's where Parent PLUS Loans come in. But what exactly are these loans, how do they work, and what should you consider before taking one out? In this guide, we'll break down everything you need to know about Parent PLUS Loans, so you can make an informed decision about financing your child's education.
What Are Parent PLUS Loans?
Parent PLUS Loans are a type of federal student loan available to parents of dependent undergraduate students. Unlike other federal student loans that students can borrow on their own, Parent PLUS Loans are borrowed by parents to help pay for their child's education. These loans are part of the U.S. Department of Education's Direct Loan Program, and they can be used to cover any costs not already covered by the student's financial aid package, such as tuition, room and board, and other educational expenses.
Importantly, these are loans taken out in the parent’s name. As a result, these loans are the parent’s legal obligation to pay.
How Do Parent PLUS Loans Work?
Parent PLUS Loans work differently than other federal student loans. Here's how the process typically works:
Application Process: To apply for a Parent PLUS Loan, you'll need to complete the Free Application for Federal Student Aid (FAFSA) and a separate PLUS Loan application. The application can be completed online through the Federal Student Aid website.
As part of the application process, the Department of Education will conduct a credit check to determine your eligibility. This credit check is essentially pass or fail. As long as you are not over 90 days delinquent on an outstanding loan, haven’t defaulted, or hit bankruptcy, you are eligible.Loan Amount: The maximum amount you can borrow with a Parent PLUS Loan is the cost of your child's education minus any other financial aid they receive. For example, if your child's school costs $30,000 per year and they receive $10,000 in scholarships and other aid, you can borrow up to $20,000 with a Parent PLUS Loan.
Interest Rates: Parent PLUS Loans have a fixed interest rate, meaning the rate won't change over the life of the loan. It is fixed by Congress and not dependent on your credit score. For the current academic year (2024-2025), the interest rate is 7.54%. It's important to note that this rate is significantly higher than the interest rates on other federal student loans, so you'll want to carefully consider the long-term costs.
Fees: In addition to interest, Parent PLUS Loans also come with an origination fee, which is a percentage of the loan amount. For loans disbursed between October 1, 2023, and September 30, 2024, the origination fee is 4.228%. This fee is deducted from the loan amount before the funds are disbursed. So if you decide to borrow $20,000 for you child’s college costs, the government will add $846 to the balance to cover the fee.
Repayment Timeline: Repayment of Parent PLUS Loans begins as soon as the loan is fully disbursed, but you have the option to defer payments while your child is enrolled at least half-time and for an additional six months after they graduate or drop below half-time enrollment. And while you can only take out Parent PLUS loans for your child’s undergraduate program, you are able to defer payment if your child goes on to grad school. However, keep in mind that interest will continue to accrue during deferment, so the total amount you owe will increase if you choose not to make interest payments during this time.
Repayment Options: Once in repayment, Parent PLUS loans are eligible for the following repayment options:
Standard Repayment: a fixed payment over 10 years
Graduated Repayment: payments start lower and gradually increase every two years over a total of a 10-year period
Extended Repayment: a fixed payment over 25 years
Extended Graduated Repayment: payments start lower and gradually increase every two years over a total of a 25-year period
Income-Contingent Repayment Plan: you are only eligible for this plan after consolidating your Parent PLUS loans. Note: this is the least favorable income-driven repayment plan. Through the use of a loophole, you may be eligible for more favorable income-driven repayment plans. See below.
Pros and Cons of Parent PLUS Loans
Before taking out a Parent PLUS Loan, it's important to weigh the pros and cons. Here are some key considerations:
Pros:
Ease and Accessibility: If you are found eligible (and the bar is set low here), you can borrow as much as you want, up to the full cost of attendance minus any financial assistance to your child. This can make your child’s school of choice accessible.
Covers Education Costs: Parent PLUS Loans can cover any remaining costs that your child's financial aid doesn't cover, allowing them to attend the school of their choice without financial stress.
Flexible Borrowing Limits: You can borrow up to the full cost of your child's education, which can be helpful if you need to cover expensive tuition, room and board, or other costs.
Fixed Interest Rates: The interest rate on Parent PLUS Loans is fixed and not dependent on your credit score, meaning your monthly payments won't change over time, making it easier to budget.
Eligible for Loan Forgiveness: After certain criteria are met, these loans may be eligible for forgiveness through the following programs:
Public Service Loan Forgiveness [link]
Standard forgiveness
Discharge Due to Death [link]
Cons:
High Interest Rates and Fees: The interest rate and fees on Parent PLUS Loans are the highest among the Federal student loans, which means you'll pay more in interest over the life of the loan.
Expensive: With the ease and accessibility of these funds comes a high cost. Of the Federal student loans, these have the least repayment options, and of the options available to parent borrowers, they are the least affordable.
Repayment Responsibility: As the borrower, you're responsible for repaying the loan, even if your child doesn't graduate or has trouble finding a job after graduation.
Time Horizon: While a 20-something just out of school has decades until they hit retirement age, the time horizon is much shorter for a parent borrower. This means you may have to work longer than expected to pay off these loans, or you may have to carry these loans into retirement.
Should You Take Out a Parent PLUS Loan?
Deciding whether to take out a Parent PLUS Loan is a personal decision that depends on your financial situation and your willingness to take on debt. Here are some questions to ask yourself before making a decision:
Can I Afford the Payments? It’s crucial to understand what the payments could become before taking out the loans. Consider whether you can comfortably afford the monthly payments, especially if you have other financial obligations like a mortgage, car payment, or retirement savings.
What About Loan Forgiveness? Consider your current and future income levels, your employment situation, and your health. These could all factor in deciding whether a forgiveness strategy makes sense.
What Are My Other Options? Explore other ways to pay for your child's education, such as scholarships, grants, work-study programs, and private student loans.
Will My Child Be Able to Contribute? Talk to your child about their plans for repaying the loan after graduation. While the loan is in your name, some families make arrangements for the child to help with (or make) payments once they start working.
What Are the Long-Term Costs? Consider how much interest you'll pay over the life of the loan and whether you're comfortable with the total cost.
Planning Note: Using the Double Consolidation Loophole to Make Repayment More Affordable
While Parent PLUS Loans can be incredibly restrictive, a loophole known as the double consolidation loophole can unlock massive savings on loan repayment. If you are staring at a massive Federal student loan balance, this can save you tens of thousands of dollars, sometimes even saving borrowers in the six figures!
Final Thoughts
Parent PLUS Loans can be a valuable tool for helping your child achieve their educational goals, but they come at a high cost. Before taking out a loan, make sure you fully understand the terms and are confident in your ability to repay it. If you're unsure whether a Parent PLUS Loan is the right choice for your family, consider consulting with a financial advisor who can help you weigh your options and make the best decision for your financial future.
By taking the time to carefully consider all the factors involved, you can make an informed decision that supports your child's education while protecting your own financial well-being.
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