Parent PLUS Loan
Parents looking for a student loan at an affordable interest rate should consider a Parent Plus loan. This loan is for any parent who has a child attending college and pursuing their first undergraduate degrees. Many parents don’t have enough money in savings for their child to attend the school of their dreams, so they take out personal loans or get the most out of their credit cards to cover the difference in the amount.
Money they saved and the cost of attendance. This could lead to parents having unnecessary high interest loans and ultimately parents to more financial stress and strain.
Many parents do not realize that the federal government offers a student loan with bad credit where parents can borrow a loan specially designed to help them enroll their children in college. This Parent Loan, also known as the Parent Plus Loan, offers very attractive fixed interest rates and favorable repayment options and is administered by the Ministry of Education.
Parent PLUS Loan
The Parent Plus Loan offers loans to parents up to the difference between what their child will receive in financial assistance and the tuition fees. The Direct Parent Plus Loan offers an interest rate of 8.5% fixed for the entire repayment term.
This is a much lower interest rate than other private bank and payday student loans, since the Department of Education is a not-for-profit federal government agency. Parents are required to pay an additional 4% origination fee for each loan disbursement, which is used to pay for the costs of running the financial aid program for students and guarantee agency services.
What Are The Advantages Of Parent PLUS Loans?
1. You Can Borrow As Much As You Need
Unlike other types of federal student loans, Parent PLUS loans have virtually no borrowing limits. You can borrow up to the cost of tuition less any other financial assistance received.
This can be useful if your child’s financial support is insufficient or if you cannot cover your expected family contribution.
At the same time, you have to be careful not to get into too much debt. Since your borrowing is limited only by the cost of dating, you run the risk of taking out more loans than you can afford to repay.
Before you finalize your papers, calculate the numbers with our student loan calculators to make sure your budget can handle repayment.
2. Your Interest Rate Will Remain Fixed For The Duration Of The Loan
Like other federal student loans, the interest rate on the Parent PLUS loan is fixed and stays the same for the life of the loan. Even if national interest rates rise, you will be stuck on the rate you got when you first took out the loan.
What is the interest rate for a Parent PLUS loan? As of July 1, 2020, Parent PLUS loans carry an interest rate of 5.30%.
Let’s say you took out a total of $30,000 in Parent PLUS loans at 5.30% interest rate. If you paid it off with a standard 10-year repayment plan, you would pay a total of $8,714 in interest.
If you have good credit, it may be worth shopping around for private lenders before choosing a Parent PLUS loan. SoFi, for example, offers APRs as low as 2.49% on student loans from parents.
If you could get a lower rate than the 5.30% Parent PLUS loan interest rate, you could save money in the long run. Otherwise, a PLUS loan could be the solution. By shopping around for several lenders, you can find the education loan with lowest interest rate.
3. You Have Several Reimbursement Options
While Parent PLUS loans have the downside of having origination fees (see downside # 2 below), they do earn points for flexible repayment plans.
Parent PLUS loans are eligible for the following plans:
- Standard repayment plan: Pay off your loans with fixed monthly payments over 10 years.
- Gradual repayment plan: Start with small payments that gradually increase over 10 years.
- Extended Repayment Plan: Make fixed or progressive payments over 25 years.
- Payout Based on Income: If you consolidate first, you’ll pay 20% of your Discretionary Income or what you would pay on a 12-year plan, whichever is lower. If you have a balance after 25 years, you may be eligible for your student loan waiver.
As you can see, you have several refund options. They can increase or decrease your monthly bills. You can make additional payments to pay off the loan as quickly as possible or extend your term to 20 or 25 years for financial relief.
These flexible repayment plans can save your life if you lose your job or experience financial hardship. Note that private student loan companies generally do not offer these same protections, but some will allow you to withhold payments by forbearance in certain circumstances.
If you’re concerned about your ability to repay a parental loan, a federal Parent PLUS loan might be the more accommodating option. But if you don’t anticipate repayment problems, you might prefer a private lender.
What Are The Disadvantages Of Parent PLUS Loans?
1. You Must Pass A Credit Check
Although you can borrow as much as you need with a Parent PLUS loan, you must first pass a credit check for approval. You don’t necessarily need great credit, but you can’t have a bad credit history.
The Department of Education says you have adverse credit if any of the following apply:
- You have debt greater than $2,085 that is 90 days or more past due or that has been placed in collection within the past two years.
- Your credit report shows any of the following for the past five years: default; discharge from debt in bankruptcy; seizure or repossession; tax lien or wage garnishment; write-off of federal student debt.
Even with adverse credit, you may still be eligible for a Parent PLUS loan by applying with a creditworthy endorser. An endorser acts as a co-signer; they are also responsible for the debt in case you miss payments.
In addition to this credit check, Parent PLUS borrowers must also meet general eligibility requirements for federal assistance, including as a U.S. citizen or national.
As long as you meet these conditions, you should be eligible for a Parent PLUS loan.
2. Parent PLUS Loans Come With Origination Fees
In addition to interest, you may also want to consider additional fees associated with origination fees. As of October 1, 2020, all Parent PLUS loans come with a 4.228% origination fee.
If you borrowed $30,000, you would pay an assembly fee of $1,324.40. These additional fees are a huge expense on top of all the interest you will pay.
Since many private student loans do not come with an origination fee, it is worth comparing your options so that you can find a loan with the lowest borrowing costs.
3. You Are Supposed To Start Paying Off Immediately
When your child takes out a student loan, they usually don’t have to pay it off while they’re still in school or for six months after graduation.
But what is the repayment term for a Parent PLUS loan? Turns out, you need to start paying off a Parent PLUS loan right away. The repayment occurs immediately after the repayment of the totality of your loan.
That said, it is possible to apply for a student loan deferral while your child is in school and for six months after graduation.
If you are granted a deferral, remember that interest will continue to accrue on your Parent PLUS loan even if payments are suspended.
Who Can Borrow From The Parent PLUS Loan Program
|Biological Or Adoptive Parent||Yes|
|Stepparent||Yes, But for as long as the stepparent is married to the student’s parent|
|Grand Parents, Aunts, Uncles, Other Relatives||No, Unless they have legally adopted the student|
|Legal Guardians Or Foster Parents||No|
Other Requirements For A Parent PLUS Loan
The parent and dependent student must also meet general eligibility requirements for federal student assistance and federal student loans.
- Students must be enrolled in the school at least part-time
- Male students must have enrolled in Selective Service (not required for father)
- Students and parents must be U.S. citizens or nationals, permanent residents, or qualifying non-citizens
- Students and Parents Cannot Default on a Federal Student Loan
- Parent PLUS loan proceeds must be used for educational purposes
Parent PLUS Loan Limits: How Much Can You Borrow
The annual loan limit for a Parent PLUS loan is the total annual cost of tuition less other financial aid received by the student. There is no aggregate (cumulative) loan limit.
The cost of participation includes:
- Tuition and fees
- Room and board
- Various personal expenses
Compare Your Options To Find Your Best Student Loan For Parents
Parent PLUS loans are a useful option for parents who want to help their children pay for their higher education. They are relatively easy to obtain, and you can borrow as much as you need.
But with the benefits of Parent PLUS loans, come some potential drawbacks as well, such as a set-up fee and an interest rate that might be higher than you might get from another lender.
Be sure to consider private student loans with potentially better terms or rates to make sure you’re not wasting money on interest and fees.
Refusal Of A Parent PLUS Loan
If you have an adverse credit history, you can still borrow from the Parent PLUS loan program. You have two options: submit a successful extenuating circumstances appeal for an exceptional circumstance, or reapply with a co-signer who does not have an adverse credit history.
If you want to appeal the decision, you must submit a request to appeal the decision and provide information regarding your refusal decision. If successful, you may need to take some loan advice before you receive the Parent PLUS loan funds.
If you want to apply with a co-signer who does not have adverse credit, the co-signer will need to complete an endorser application.
Now, if none of these options work for you, your denial of a Parent PLUS loan would in effect make your dependent undergraduate eligible for Stafford loan limits for independent undergraduates. This means that they will have access to additional loan funds that they can borrow on their behalf to help pay their own tuition fees.