It’s not uncommon for new parents to set up a savings account for their child’s education fund while they’re still changing diapers. And, with a little luck, when it’s time for their son or daughter to head off to college, they’re able to provide a solid financial foundation on which to build.
But, with the cost of post-secondary education constantly rising, it’s rare for savings alone to provide everything their child needs. As a result, traditional student loans have become a mainstay of educational financing. However, many parents have decided to take their commitment to funding their child’s education a step further by taking on college loans that are specifically designed for parents rather than children.
StudentLoanHero.com reported, “as of the end of 2017, about 3.5 million parents have borrowed a collective $83.9 billion in Parent PLUS Loans from the federal government, according to the Office of Federal Student Aid.”
As the name suggests, these education loans are paid directly to the parents, so the students themselves are not responsible to repay them. Considering the controversial burden of student loan debt in today’s economy, this opportunity appeals to many families as a way to help get undergraduate students off to a good start in life without needing to face crushing debt out of the gate.
That being said, Parent PLUS Loans are quite a bit different from standard student loan programs you’re likely more familiar with. The following overview should offer everything you need to know to determine if a Parent PLUS Loan is the right choice for your family, and how to go about obtaining one if you choose to do so.
What is the Parent PLUS Loan program?
The U.S. Department of Education makes Direct PLUS Loans to eligible borrowers through schools participating in the Direct Loan Program.
Unlike traditional student loans, where the student is the borrower, a Parent PLUS loan is one that parents take out to put their undergraduate child through school. If the parent takes out a Parent PLUS loan, they are the responsible party, and the child has no obligation to repay it.
As far as requirements go:
- Parents can only apply for this loan if the student qualifies as dependent for federal aid purposes.
- Both parent and child must be U.S. citizens or eligible non-citizens and not be in default on any federal education loans, or owe an overpayment on a federal education grant.
- The student must be enrolled at least half-time in an eligible program, and meet Satisfactory Academic Progress standards for financial aid eligibility for the loan to disburse.
- Parent PLUS Loans are credit-based. While the borrower doesn’t need to have perfect credit, they can’t have an adverse credit history either.
- The maximum amount that can be borrowed is limited to the full cost of attending the school (a figure that’s determined by the school) less any other financial aid the student receives.
- Unlike traditional student loans — where repayment is usually deferred until at least six months after graduation — repayment of Parent PLUS Loans begins immediately.
With these factors in mind, it’s important for parents and students to give some thought to the pros and cons of taking out a Parent PLUS Loan as part of their college funding plan.
Why a Parent PLUS Loan may be a great idea
The Parent PLUS loan program is designed for easy approval and quick turnaround time. And, like other federal student loan programs, applicants may be eligible for federal repayment and forgiveness programs (although availability is more limited than with other traditional government education loan programs.)
Unlike other types of federal student loans, Parent PLUS Loans have virtually no limits when it comes to borrowing. You can borrow up to the cost of attendance minus any other financial aid received. This can be helpful if your child’s financial aid package falls short or you can’t cover your Expected Family Contribution (EFC).
Your loan money will usually be paid out in at least two installments. Your child’s school will credit the loan money to his or her account to pay tuition, fees, and other authorized charges. Any remaining loan funds will be paid to you directly, unless you authorize the school to pay this money to your child.
Like other federal student loans, a Parent PLUS Loan comes with a fixed interest rate that stays the same throughout the life of the loan. Even if national interest rates rise, you’ll be locked in with the rate you got when you first took out the loan. As of July 1, 2017, Parent PLUS Loans come with a 7.00% interest rate.
And, of course, the most appreciated benefit of the Parent PLUS loan program (for the student, at least) is the fact that the debt is not the student’s responsibility. So, they’ll be able to graduate and head out into the workforce without the burden of that loan’s balance weighing down their progress.
Why a Parent PLUS Loan may not be the best idea
Most experts recommend that students first max out on federal direct loans, both subsidized and unsubsidized, before parents consider applying for a Parent PLUS Loan. This is because the more traditional student loan programs include important deferment, income-based repayment, and loan forgiveness options that Parent PLUS loans may not offer. Additionally, the interest rates on traditional student loans are often significantly lower, and repayment is usually deferred until at least six months after graduation.
That being said, the other major concern for parents is the impact a Parent PLUS Loan can have on their own financial situation. While every parent wants to do what’s best for their child, and recognize that sacrificing something comes with the territory, it’s unwise to permanently ruin your own finances to try to help improve your son or daughter’s situation.
You have to be careful not to take on too much debt. Since there’s virtually no cap on borrowing, you run the risk of borrowing more than you can afford to pay back. Additionally, on top of interest, you might also consider the added expense of an origination fee. As of Oct. 1, 2017, all Parent PLUS Loans come with an origination fee of 4.264 percent.
What is the application process like for Parent PLUS loans?
Applying for a Parent PLUS Loan is easy and straightforward:
- Most schools require that your PLUS loan application be processed through gov. Some schools have different application processes.
- Your child must complete the Free Application for Federal Student Aid (FAFSA®).
- The parent must then complete the Federal Direct PLUS Loan Master Promissory Note (MPN).
The only other item parents should consider before applying for a Parent PLUS Loan is the current state of their credit report and history. Since it is credit-based, approval for this loan will depend, to some extent, on your credit score. If there are currently errors or outdated information on you credit report, it could negatively affect your ability to obtain this loan.
If you need to, take the time to fix your credit before starting the Parent PLUS Loan application process.
And, what does repayment look like?
A Parent PLUS Loan can be repaid over anywhere from 10 to 25 years, depending on the repayment plan you choose. Like any other long-term loan, your required monthly payment will vary based on how much you borrowed, interest rates, and your repayment plan.
There are certain circumstances where you may be able to temporarily stop or lower your payments — called a deferment or forbearance — on a Parent PLUS Loan, but you can’t do this as easily as with other federal student loan programs.
One of the key factors parents need to know when considering a Parent PLUS Loan is the fact that repayment kicks in as soon as the entire loan has been paid out. Under certain circumstances, it’s possible to apply for deferment, which would defer payments while your child is in school. However, if you’re granted a deferment, interest will continue to accrue on your Parent PLUS Loan even while payments are paused.
Finally, note that you are responsible to repay your Parent PLUS Loan even if your child doesn’t complete his or her education, you’re unhappy with the quality of the education received, or your child can’t find a job related to his or her program of study. Should you become totally and permanently disabled, have your loan discharged in a bankruptcy, or either you or the student dies, the loan can be discharged.
So, now that you have a solid foundation of knowledge regarding the Parent PLUS Loan, you’re in an excellent position to decide if it’s right for your family. If you need to get your or your child’s finances in better order before considering education loans, contact CreditRepair.com to get started today.
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