I have a simple question: Is there currently a better option to
help finance my sophomore daughter's college education than a PLUS loan?
— Alan S.
When considering how to finance a college education, there are many
options, including federal education loans, private student loans and
non-education loans. It is important to carefully weigh the costs,
benefits and risks of each option. These include the interest rates
and fees on each loan, whether the interest rate is fixed or variable,
when repayment begins, repayment plans, options for dealing with
financial difficulty and the consequences of default.
Federal Education Loans
The Federal Parent PLUS loan is borrowed by parents of dependent
undergraduate students. The annual
limit is up to the full cost of attendance minus other aid received,
with no aggregate limit. Payments on the Federal Parent PLUS loan can be
deferred while the student is enrolled on at least a half-time basis
and for six months after graduation.
Eligibility for the Federal Parent PLUS loan does not depend on
financial need, so even wealthy parents may borrow from the Federal
Parent PLUS loan program. There is a modest credit check that looks for
adverse events in the borrower's credit history, such as delinquences,
defaults, bankruptcy discharge, foreclosure and repossession. The
credit check does not, however, consider credit scores or
The Federal Stafford loan is borrowed by students, not parents. It is
a less expensive option, but it has lower loan limits. The Federal
Stafford loan comes in two versions, subsidized and
unsubsidized. Eligibility for the subsidized loan depends on financial
need, while the unsubsidized loan does not. Neither version involves a
credit check, so even a borrower with a bad credit history can
qualify. The federal government pays the interest on subsidized loans
during deferments, such as during the in-school deferment and the
economic hardship deferment.
Repayment options for Federal Stafford and PLUS loans include standard
repayment (10-year term), extended repayment (10 to 30 year terms
based on the loan balance) and graduated repayment (payments increase
every two years). Income-based repayment is available for federal
student loans but not federal parent loans. (Income-contingent
repayment, a predecessor of income-based repayment, is available for
Federal Parent PLUS loans that have been consolidated into the Direct
Loan program, if the parent did not enter repayment prior to July 1,
2006.) Income-based repayment is a safety net that bases the monthly
payment on a percentage of the borrower's discretionary income, not
the amount owed. Federal student loans offer forgiveness for
borrowers who work full-time in a public service field while repaying
their loans under income-based repayment in the Direct Loan program.