When Is a Parent PLUS Loan a Good Idea?

Federal student loans are a common way to finance higher education, with Parent PLUS Loans serving as one option for families. These federal loans are designed for parents of dependent undergraduate students to cover educational expenses not met by other financial aid. They aim to bridge funding gaps, ensuring students can pursue their academic goals.

Characteristics of Parent PLUS Loans

Parent PLUS Loans are federal loans made directly to the parents of dependent undergraduate students. The loan is solely in the parent’s name, meaning the parent, not the student, is responsible for repayment. To qualify, the student must be enrolled at least half-time at an eligible educational institution. The parent borrower must also meet general eligibility criteria, including not having an adverse credit history.

An adverse credit history includes specific financial events, such as significant delinquencies, bankruptcies, foreclosures, or debts in collection. If a parent has an adverse credit history, they may still be able to obtain a loan by securing an endorser or documenting extenuating circumstances.

Parent PLUS Loans have a fixed interest rate for the life of the loan. There is also an origination fee deducted proportionately from each loan disbursement. Parents can borrow up to the total cost of attendance at the student’s school, minus any other financial aid the student receives. The funds are specifically intended to cover legitimate educational expenses.

Applying for a Parent PLUS Loan and Disbursement

The process for obtaining a Parent PLUS Loan begins with the student completing the Free Application for Federal Student Aid (FAFSA). The parent can then submit a specific Parent PLUS Loan application, often available online through the Federal Student Aid website. This application initiates a credit check to determine if the parent has an adverse credit history.

If the credit check reveals an adverse credit history, the parent has options to still secure the loan. One path is to obtain an endorser, similar to a cosigner, who agrees to repay the loan if the parent borrower does not. The endorser must not have an adverse credit history and cannot be the student for whom the loan is intended. Another option is to document extenuating circumstances that led to the adverse credit history. If approved through these methods, the parent borrower must complete PLUS Credit Counseling.

After approval, the parent must sign a Master Promissory Note (MPN), a legal document agreeing to the loan terms. Loan funds are typically disbursed directly to the student’s school to cover tuition, fees, and other institutional charges. If any funds remain after the school’s charges are covered, the balance is usually disbursed to the parent, or to the student if authorized by the parent.

Repaying Parent PLUS Loans

Repayment for Parent PLUS Loans generally begins 60 days after the final loan disbursement for that academic year. Parents can request a deferment to postpone payments while the student is enrolled at least half-time and for an additional six months after the student leaves school. Interest continues to accrue during deferment periods, and if not paid, it will be capitalized, meaning it is added to the principal balance.

Parent PLUS Loans offer several repayment options:
Standard repayment involves fixed monthly payments over a 10-year period.
Extended repayment allows for fixed or graduated payments over up to 25 years for loan balances exceeding $30,000.
Graduated repayment starts lower and gradually increases over a 10-year period.

An Income-Contingent Repayment (ICR) plan is also available for Parent PLUS Loans, but it requires an extra step. To qualify for ICR, Parent PLUS Loans must first be consolidated into a Direct Consolidation Loan. Under ICR, monthly payments are capped at the lesser of 20% of the borrower’s discretionary income or the amount that would be paid on a fixed 12-year repayment plan. Payments are recalculated annually based on updated income and family size.

Alternatives to Parent PLUS Loans

Before considering a Parent PLUS Loan, families should explore other funding sources for higher education. Federal student loans available directly to students, such as Direct Subsidized and Unsubsidized Loans, are a primary option. Direct Subsidized Loans are for undergraduate students with demonstrated financial need, and the government pays the interest while the student is in school at least half-time, during the grace period, and during deferment. Direct Unsubsidized Loans are available to undergraduate and graduate students regardless of financial need, but interest begins to accrue immediately upon disbursement. These student loans typically have lower interest rates than Parent PLUS Loans.

Private student loans, offered by banks, credit unions, and other financial institutions, are another alternative. These loans are credit-based and often require a cosigner if the student has limited credit history. Private loans can have either fixed or variable interest rates, which may be lower than federal loan rates for borrowers with excellent credit. However, they generally offer fewer borrower protections and less flexible repayment options compared to federal loans.

Beyond loans, several non-loan options can help reduce college costs:
Scholarships and grants are particularly beneficial as they do not need to be repaid. These can be awarded based on academic merit, financial need, specific talents, or other criteria.
Personal savings accumulated for education avoid interest accrual.
Work-study programs allow students to earn money through part-time employment.
Starting at a less expensive institution, such as a community college, for the first one or two years can significantly reduce the overall cost of a bachelor’s degree.

Factors for Parents to Consider

Parents contemplating a Parent PLUS Loan should thoroughly assess their current financial health, including income, existing debts, and emergency savings. Taking on additional loan debt can impact a family’s financial flexibility and future borrowing capacity.

Prioritizing retirement savings is an important financial planning consideration. Parents should not jeopardize their retirement security to pay for their child’s education. Retirement funds, unlike college savings, typically do not have alternative funding sources or loan options.

Considering the student’s future earnings potential can also be a factor, even though the loan is the parent’s responsibility. The student’s chosen field of study and realistic post-graduation salary prospects can indirectly influence the parent’s financial burden. However, the legal obligation for repayment remains solely with the parent.

Understanding the total cost of attendance is also important, which extends beyond tuition and fees to include living expenses, books, supplies, and other personal costs. Borrowing only what is truly needed can help minimize the debt burden. Parent PLUS Loans can also affect the parent’s credit score and debt-to-income ratio, which may impact their ability to secure other loans, such as a mortgage or car loan, in the future. Open and honest communication within the family about college costs and financial responsibilities can help ensure everyone is aligned.