Parent PLUS loans can be a good alternative to private student loans because they offer more flexible repayment options. But Parent Plus loans can be more expensive than other options, and the consequences for default are harsh, including the potential for wage and Social Security garnishments. Here is an overview of this student loan option.
What is a Parent Plus Loan?
Direct Plus Loans are a federal student loan program. One type of direct PLUS loan is a parent PLUS loan, which is given to a dependent graduate student’s parent or legal guardian to help cover the cost of the student’s education.
With a Parent PLUS loan, parents can borrow up to the cost of a child’s attendance each year, minus any financial aid, with no limit on the amount borrowed. This is true regardless of the parent’s income. Although an unlimited loan source may seem attractive, there is a real possibility for parents to get into heavy debt.
PLUS Loans are not made to grandparents on behalf of a student grandchild unless they are the student’s legal guardian.
How does the Parent Plus Loan work?
Parent Plus loans have a fixed interest rate, and the borrower pays an origination fee for each loan. Parent PLUS loans are not subsidized, so interest starts accruing on the outstanding loan balance as soon as the funds are disbursed and continues to accrue even if the loan is in deferment.
This is not a student loan. New Hampshire student loan attorney Richard D. “It’s not a co-signed loan,” Gaudreau said. These credit-based loans are made to parents alone and are different from private student loans, which can be co-signed by parents.
Is it better to get a parent plus loan or a private loan?
Both loans have advantages and disadvantages. Parent PLUS loans have more options for repayment plans and forgiveness, but interest rates are higher and the federal government has greater collection power than private lenders. Private student loans can help you save on interest, but you’re more limited in forgiveness and repayment programs.
Perhaps the most important difference between Parent PLUS loans and private student loans is that federal student loan borrowers can take advantage of income-driven repayment plans, and private student loan borrowers cannot.
Another important difference is in the lender’s collection options. “Federal debt can be difficult to get rid of during bankruptcy,” says Gaudreau. By default, “The government can garnish your wages. They can take up to 50% of your Social Security. They can withhold your tax refunds. They have more power to collect.”
Private student loan lenders do not have the same garnishment powers. “There is a statute of limitations on collections for private loans, but not for federal loans,” Gaudreau says.
Parent PLUS loans are forgiven if the student or parent borrower dies. Private loans are still collectable in the event of death, although some lenders have forgiveness policies for death or disability.
The main advantage private student loans offer is that they come with lower interest rates than their federal counterparts. A borrower may see a difference of 2% or more depending on their credit standing. Over a 10-year or longer repayment period, lower interest rates can add up to significant savings.
With a parent loan, you’re taking out a loan for someone else’s benefit, possibly while trying to save for retirement and limit debt. Many financial experts discourage jeopardizing your financial stability in retirement to help a family member. A private student loan taken out by a student places the responsibility of repayment on the beneficiary.
Kat Tretina, freelance finance writer and former content writer at Student Loan Hero, agrees. Parent PLUS loans “could be too much debt to pay off and potentially put your own retirement at risk to do so.”
When does Parent Plus loan repayment start?
Once the loan amount is disbursed, parents are expected to start making payments. However, you can request a loan deferral until the student graduates, drops below half-time enrollment, or drops out of school.
Income-contingent repayment plans are available for parent PLUS loans, but you must first consolidate the loan into a direct consolidation loan.
For a Parent Plus Loan borrower at risk of falling behind on payments, an ICR plan can potentially reduce the required monthly payment to an affordable level. Depending on your income, “you can get payments as low as $0,” says Gaudreau.
Under the ICR scheme, your required minimum repayment will be 20% of your discretionary income or the amount you would have to pay in a 12-year fixed repayment scheme, adjusted according to your income.
The Department of Education defines discretionary income under the income-contingent repayment plan as the difference between your annual adjusted gross income and 100% of the poverty guidelines for your family size and state of residence.
Parent PLUS loans are eligible for the Public Service Loan Forgiveness Program, in which the remaining balance is forgiven after the borrower makes 120 qualifying monthly payments and the borrower is employed full-time by a qualifying employer.
“If parents work for a nonprofit organization or government agency—regardless of their role—they may qualify for public service loan forgiveness,” says Tretina. “Under this program, their loan balance is forgiven after 10 years of qualifying payments.”
The government recommends that any borrower pursuing loan forgiveness verify their employment each year by submitting the necessary forms for approval.
What is the interest rate on Parent Plus Loans?
The Parent PLUS loan interest rate – 7.06% as of July 2019 – is generally higher than the rate on private student loans.
“With such high-interest rates, the balance on the loan can grow over time, causing parents to pay thousands more than they originally borrowed,” says Tretina. “So much debt can cause them to delay saving for retirement to afford the loan payments.”
Interest rates on Parent PLUS loans may be higher than rates on other possible financing sources. For example, parents who own a home may be able to get a cash-out to refinance their mortgage at a lower rate.
Parent PLUS loans also come with an origination fee — currently, 4.236% — that is deducted before the loan is disbursed. That’s $423.60 out of every $10,000 borrowed. Interest is calculated on the full amount borrowed before charges are deducted.
Can I afford the Parent Plus Loan?
It’s possible to get a parent plus loan that you can’t afford. The Parent Plus loan application is based on the borrower’s credit history; No loan officer will look at your income or other debt, or otherwise assess whether you are able to pay. It is your responsibility to ensure that you do not borrow more than you can repay. Although the ICR plan is available on consolidated direct loans, keep in mind that you will need to budget for 25 years of payments.
A Parent PLUS Loan may be best suited to someone who may not have enough assets to pay for a child’s education out of pocket but expects to maintain a steady income — such as a parent who is at least 25 years old, or who is about to retire. A beneficiary of a trust or other reliable, long-term source of income.
“Unless you can easily afford the payments and/or plan to pay them off ahead of time, and you already have significant savings for retirement, you may not be a good candidate for a Parent PLUS loan,” says Tretina. “Especially because with Parent Plus Loans, you could be putting your Social Security at risk.”
Parent Plus Loan Application and Approval Process
A parent or legal guardian of a dependent graduate student can apply for a Parent PLUS loan. First, you must fill out the Free Application for Federal Student Aid, or FAFSA, for the academic year you want to borrow. Then you can apply for a PLUS loan. Parent PLUS loan eligibility requires that you:
- Is the parent of a dependent graduate student enrolled at least half-time in an eligible school
- Do not have an adverse credit history, obtain an approval or show extenuating circumstances
- Meet the general eligibility requirements for federal student aid with your child
You can get a parent plus loan with bad credit if you get an approver if you don’t agree to repay the loan. Or, you can document extenuating circumstances such as bankruptcy or divorce. Generally, a job loss is not enough by itself to constitute an extenuating circumstance.
Is the Parent Plus Loan Right for Me?
Parent PLUS loans, like any loan, should be approached with caution. Before applying for a Parent PLUS Loan, consider other ways to finance your child’s education, including scholarships, grants, and federal and private student loans.
“Maximize grants and scholarships before taking out any loans,” says Tretina. “Many students pay for school with only scholarships. It can be done.”
When free money options run out, help your kids apply for loans in their names. It makes your child responsible for their own debt and protects your retirement, and it can come with savings.
Students get much lower rates on federal student loans than parents. The interest rate for Graduate Direct Grants and Direct Unsubsidized Loans is currently 4.53%. And finally, students have more working years than their parents.