Questions about Qualifying for the Federal Parent PLUS Loan

My son has been accepted to an expensive private non-profit college for the fall. We have been awarded a pretty generous financial aid package from the school (approximately $30,000) which leaves me with about $20,000/year left to finance. I make about $50,000/year. I will be applying for the Parent PLUS loan and have several questions. I’m in the process of refinancing my home and know that my credit score is 748. I have done a lot of research on this loan and I guess I’m just looking for reassurance. My biggest fear is that when it comes time to apply, I will not be approved or something will stand in our way. I believe my credit shouldn’t be a problem, but my income is not very high. Over the course of four years and approximately $20,000 in loans each year, would this be a problem in getting approved, due to the high debt to income ratio? Also, the loan can be deferred until after my son graduates, correct? Can I be put on a repayment plan that is income based? I know we will be paying this loan for a long time (25 years or so), but was hoping that there is some leniency in the way the loan is repaid. Any information you can provide will be greatly appreciated. Thank You! — Robert B.

The Federal Parent PLUS loan can be deferred while the student is in school on at least a half-time basis and for six months after the student graduates or drops below half-time enrollment. The interest will be added to the loan balance if it is not paid as it accrues. This can increase the loan balance by about a fifth.

Eligibility for the Federal PLUS loan does not depend on the borrower’s credit scores. Eligibility also does not depend on income, debt-to-income ratios or debt-service-to-income ratios. The eligibility criteria also do not consider whether the borrower owes other types of debt.

A Federal PLUS loan borrower must not have an adverse credit history, which is defined in the regulations as involving a current delinquency of 90 or more days on any debt or a five-year lookback for certain derogatory events, such as bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment or a default determination.

Even if a parent has been denied a Federal PLUS loan because of an adverse credit history, it may still be possible to get a Federal PLUS loan. If the denial was due solely to a 90-day delinquency, the parent can make payments to bring the delinquent account current and then reapply for the Federal PLUS loan. The parent can appeal the Federal PLUS loan denial based on extenuating circumstances. The parent can also get approved if a creditworthy endorser agrees to cosign the loan. If one parent has an adverse credit history and the other does not, the parent with good credit can apply for the Federal Parent PLUS loan.

If the parent has been denied a Federal Parent PLUS loan, the student may be eligible for an additional $4,000 or $5,000 per year in unsubsidized Stafford loans, depending on the year in school.

But just because you can borrow all the remaining costs doesn’t mean you should. Repaying $80,000 in Federal Parent PLUS loans on a $50,000 annual income will be difficult. The monthly payments will represent almost a quarter (23%) of gross income on a 10-year repayment term, 16% on a 20-year term and 14% on a 30-year term. Anything over 10% will be a struggle, and 15% is the stretch limit for most people. These correspond to about $34,500 and $51,750, respectively, on an annual income of $50,000 and a 10-year repayment plan.

Parents should not borrow more than they can afford to repay in 10 years or by the time you retire, whichever comes first. For most parents this means borrowing no more than the parent’s annual income and ideally a lot less. Parents should also not count on the child being able to help them repay the Federal Parent PLUS loans. The total student loan debt at graduation, including any Federal PLUS loans the parent expects the student to repay, should be no more than the student’s expected annual starting salary.

Federal Parent PLUS loans are not eligible for the income-based repayment or pay-as-you-earn repayment plans. Federal consolidation loans that repaid a Federal Parent PLUS loan are also not eligible for the income-based repayment or pay-as-you-earn repayment plans. (Federal student loans, including the Federal Stafford and Federal Grad PLUS loans, are eligible for income-based repayment and pay-as-you-earn.)

Federal Parent PLUS loans are not directly eligible for income-contingent repayment, a less-generous predecessor of income-based repayment. However, if the Federal Parent PLUS loans were made since July 1, 2006 and have been consolidated into a Federal Direct Consolidation Loan, the consolidation loan is eligible for income-contingent repayment, per the regulations at 34 CFR 685.208(a)(2)(iii).

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