PLUS Loan Basics: What You Need to Know
The federal Direct PLUS Loan for parents is a common option for families who need more money to pay the full cost of college. It’s often included in colleges’ financial aid award packets to make up the difference between other types of aid and the cost of attendance but, like student loans, you are not required to accept a PLUS Loan.
Before taking out a PLUS Loan, carefully consider its features, benefits and drawbacks.
Features of the PLUS Loan
- Availability: The PLUS Loan is available to biological and adoptive parents, and in some cases stepparents, who do not have adverse credit history.
- Limits: A parent can borrow up to the cost of attendance amount determined by the student’s school minus other financial assistance received by the student.
- Interest Rate: The PLUS Loan has a fixed interest rate, currently at 7.00% for the 2017–2018 school year. The rate for the 2018–2019 year will be set on July 1.
- Fees: An additional loan fee is calculated as a percentage of the loan amount (currently 4.264% for disbursements on or before Sept. 30, 2018) and is deducted from each disbursement.
- Repayment: Borrowers may choose from federal repayment plans to repay the loan over 10 to 25 years. Repayment generally begins as soon as the loan is disbursed, but you may defer the payments while the student is enrolled at least half time plus an additional six months.
Benefits of the PLUS Loan
- Cash flow: Obtaining a PLUS Loan before a college bill is due allows some parents to pay for the entire term without financing fees or late penalties and then make payments on the loan as cash becomes available during the term.
- Pre- and overpayment: Some parents choose to make extra payments without penalty to pay down PLUS Loans more quickly and to lessen the impact of interest.
- Federal repayment options: You may choose from among federal repayment plans (not all are available for PLUS Loans). PLUS Loan servicers also offer deferment and forbearance options if you have difficulty making payments, but be aware that interest continues to accrue daily even when payments are not required and unpaid, accumulated interest will be capitalized, or added to the loan balance at the end of the deferment or forbearance period.
- Death and disability: The loan can be discharged if the parent borrower dies or becomes totally and permanently disabled. In addition, the loan can be discharged if the student dies.
- Cancellation: If already taken out, you can cancel all or part of the amount before the loan is disbursed. After disbursement you have a little time to cancel all or part by contacting the school financial aid office.
Drawbacks of the PLUS Loan
- Discharge: Federal PLUS Loans are rarely discharged for financial difficulties resulting from unemployment, age-related or other illnesses and injuries, or bankruptcy.
- Nontransferable: You cannot transfer the PLUS Loan to your student to repay after your student finishes school. You and your student may be able to work together to refinance the loan in the student’s name through a private lender; doing so will result in the loss of federal repayment options.
- Timing: Many parents face repayment of heavy loan debt burdens at a time of life when earning power generally decreases and limited income is needed for living or medical expenses. Default on a PLUS Loan can lead to the garnishment of Social Security benefits, tax refunds and wages.
Other Considerations Before Taking Out a PLUS Loan
The following items could be considered a drawback or a benefit, depending on personal and other circumstances.
- Qualification: Approval for a PLUS Loan does not take into consideration income, other outstanding debt, assets, income or years to retirement, so consider carefully how much you will realistically be able to repay.
- Interest: The fixed interest rate will not increase during the life of the loan, but you won’t be able to take advantage of lower market rates in the future.
Before taking on a PLUS Loan, you should also compare it to other options, such as our College Family Loan.