Due to the growing costs of higher education, a ton of student loan options have become available through the federal government and private lenders. One such option, the Parent PLUS loan, is one that truly stands out from the pack.
Unlike other Direct PLUS loans, Parent PLUS loans extend a line of credit directly to the parent, not the student. This means parents are held solely responsible for loan payment - regardless of how well their investment pays off.
If you're a parent considering a PLUS loan to help pay your child's education, read on for everything you need to know first.
Parent PLUS Loans limits, interest rates, and fees
Taking out a Direct PLUS loan for parents isn't the same thing as cosigning on your child's student loans. Where cosigning makes both parties mutually responsible for repayment, Parent PLUS loans put the entire burden of repayment on you, the parent.
While you might be happy to fund your child's education, it's an agreement that should be entered with eyes wide open. Keep in mind the maximum loan you can take out is only limited by the cost of school attendance, minus any financial aid your student receives, which could easily add up to tens of thousands of dollars per year.
Yet, the total cost of this arrangement isn't limited only to tuition, books and supplies, and room and board; those loan payments will accrue interest, too. For Direct PLUS Loans disbursed on or after July 1, 2017 and before July 1st, 2018, rates are locked in at 7%.
Further, a loan fee of 4.264% is exacted on the entire balance borrowed for Parent PLUS loans taken out on or after October 1st, 2017, and before October 1, 2018. Fees will be 4.248% for Parent PLUS loans taken out between October 1, 2018 and September 30, 2019. According to the U.S. Department of Education, this fee is proportionately deducted from each loan disbursement, thus reducing the amount of money you receive for school.
Parent PLUS Loan repayment options
No matter what, you can count on your Parent PLUS loan entering repayment once the final disbursement has been made. As a parent borrower, you may have the option to request a deferment if your child is enrolled in school at least half-time, and for an additional six months after your child ends their college experience.
Interest will accrue on your loan this entire time, however, whether you begin making payments or not. If you find yourself in this spot, it is usually smart to begin making interest payments to keep your total loan balance at bay.
Unfortunately, with Parent PLUS loans, students won't qualify for most income-driven repayment plans. Since the borrower in this case is the parent, that option ceases to exist.
The only exception is when Parent PLUS loans are consolidated into the Direct Loan Program. At that point, the balance may become eligible for Income-Contingent Repayment (ICR).
Another huge detail to remember: Parent PLUS loans can never be directly transferred to the student.
Fortunately, some private lenders such as SoFi and Earnest do allow you to refinance Parent PLUS loans into a product with a lower interest rate and better terms. It's also possible to refinance the loan in your child's name through private lenders, but only if the child applies and is approved on their own first.
Parent PLUS loans offer just one more way to pay for college, but that doesn't mean they're a smart move for everyone. Students and parents should exhaust all other types of aid first, including federal student loans that could help a student qualify for the many income-driven and loan forgiveness options available.
While access to college has become increasingly important, parent's financials shouldn't be neglected in favor of the next generation. If you're considering this route, make sure to ask plenty of questions and explore all of your options first.
ORIGINAL POST: 3-12-16; UPDATED: 4/17/18