PLUS Loans: A Loan Just for Parents (and Grad Students Too)
By Bridget Kulla
Parents of college students face added financial pressure. The federal Parent Loan for Undergraduate Students (PLUS) loan can alleviate some of that pressure.
The PLUS is a loan for parents and family members to help cover the education costs for dependent college students. PLUS loans cover up to the total cost of undergraduate education not already covered by financial aid for students enrolled at least half time. For example, if a student’s tuition costs $10,000 each year but financial aid only provides $8,000, the student’s parents can apply for a PLUS loan to cover the remaining $2,000. Graduate and professional students are also able to borrow money through the PLUS program to fund their own education.
Parents benefit from PLUS loans by borrowing federally guaranteed, low interest loans. PLUS loans are also an attractive option because they are not based on income or assets, and no collateral is needed to be eligible. PLUS loans can be used to fund tuition, school supplies, living expenses, room and board, and books. To qualify for PLUS loans, parents must have good credit histories but do not need to demonstrate financial need.
There are two types of PLUS loans, the Direct PLUS, which is provided by the government, and the Federal Family Education Loan (FFEL) PLUS, which is provided by private lenders, like banks or credit unions. Federal law requires private lenders to charge 8.5 percent on FFEL loans. Under the FFEL program, parents are responsible for finding a participatory lender, but their loan is guaranteed by the federal government. The benefits of FFEL and Direct PLUS loans are nearly identical. Parents can get either loan, but not both during the same enrollment period.
A Free Application for Financial Aid (FAFSA) is not required to apply for a PLUS loan, although some schools require that PLUS borrowers submit a FAFSA. Parents must pass a very modest credit check to qualify. Applications can be made online or by contacting your student’s financial aid office. To apply, parents must complete and sign the PLUS Master Promissory Note (MPN). The MPN guarantees your lender that you agree to the terms of the loan and promise to pay it back. Your PLUS MPN stays active for 10 years. Once you have an MPN, you only need to have your credit reviewed and request the amount you would like to borrow for future loans. If parents are denied a PLUS loan, their student becomes eligible for increased Stafford Loan amounts.
PLUS loans have advantages over other types of loans. PLUS loans have fixed interest rates of 8.5 percent for the life of the loans borrowed through the FFEL program. PLUS loans borrowed through the direct loan program have an interest rate of 7.9 percent. Interest begins to accumulate from the first PLUS loan disbursement. The interest paid on PLUS loans may be tax deductible. Other than interest, a fee of up to 4 percent of the loan is deducted proportionately each time a loan disbursement is made. This fee is used by the federal government to lessen the costs of processing of this loan and is automatically deducted, so there are no additional out-of-pocket expenses for borrowers.
Repayment of PLUS loans begins 60 days after the funds are fully disbursed. PLUS loans have a 10-year repayment term with no prepayment penalty. Unlike the Stafford Loan, there is no grace period for repayment. Parents, not students, are responsible for repaying the loan.
PLUS loans can be consolidated, which provides access to alternate repayment terms, such as extended repayment, graduated repayment and income contingent repayment. Federal regulations also allow you to consolidate each year of undergraduate study independently and then reconsolidate with any future PLUS loans. This can extend the repayment term from 10 years to 30 years. Consolidation can also reduce your interest rate.