Everything you Need to Know About the Federal Direct PLUS Loan

The US government offers various federal student loans for undergraduate students, graduate students, and parents. 

The Federal Direct PLUS Loan is an unsubsidized federal education loan for graduate students and parents of dependent undergraduate students. Students and parents can access this loan after a student exhausts eligibility for Federal Stafford Loans.

Today we’ll cover everything you need to know about the PLUS Loan, including its two versions, interest rates, eligibility, and more. 

Federal Direct PLUS Loan Quick Facts

Types of Federal PLUS Loans

There are two versions of the Federal PLUS Loan: the Federal Parent PLUS Loan and the Federal Grad PLUS Loan. The Parent PLUS and Grad PLUS loans are nearly identical, apart from borrower eligibility and certain provisions. The Federal Grad PLUS Loan first became available on July 1, 2006, through an amendment to the Federal Parent PLUS Loan.

Both loans require the college student or borrower to have US citizenship or permanent residency, and no adverse credit history. As long as those two criteria are met, PLUS loan borrowers are not required to have good credit, such as a high credit score, minimum income threshold, or low debt-to-income ratio.

However, PLUS loan eligibility is slightly different for Parent vs. Grad PLUS Loans: 

Eligibility for Federal Parent PLUS Loans

• Biological or adoptive parents of a dependent undergraduate student
• Stepparent of a dependent undergraduate student while married to the biological parent
• Dependent student must be enrolled in a certificate or degree program at least half-time
• Dependent student must be making satisfactory academic progress, such as maintaining at least a 2.0 GPA on a 4.0 scale in college.
• Dependent student and parent filled out the Free Application for Federal Student Aid (FAFSA)
• Parent and dependent student aren’t in default on a federal student loan or grant overpayment.

Eligibility for Federal Grad PLUS Loan

• Graduate or professional student
• Enrolled at least half-time in an eligible certificate or degree program

Interest Rates on Federal PLUS Loans

The interest rates on Federal PLUS Loans are fixed rates that change only for new loans each July 1. The new interest rate is based on the last 10-year Treasury Note Auction.

Interest rates are the same for both Federal Parent PLUS Loans and Federal Grad PLUS Loans.Keep in mind, however, that you are not required to pay interest or make payments on any Federal Direct Loan during the current COVID-19 relief period. The relief period is in effect through at least August 31, 2022.

The interest rates are set according to this formula:

The most recent interest rates are:

Borrowers who sign up for auto-debit, where the monthly loan payments are automatically transferred from the borrower‘s bank account to the loan servicer, may receive a 0.25% interest rate reduction as an incentive.

Is the Federal Direct PLUS Loan Subsidized or Unsubsidized?

The Federal PLUS Loan is an unsubsidized loan. Interest begins accruing immediately after disbursement.

The federal government does not pay the interest on the Federal PLUS Loan.

If the borrower does not pay the interest as it accrues, it will be added to the loan balance (capitalized) when the loan enters repayment, which increases the debt. After interest is capitalized, more interest will be charged on the interest, causing the loan to grow faster.

Loan Fees on Federal PLUS Loans

Federal Direct loan borrowers pay an origination fee of about 4.2%, four times the fee on Federal Stafford loans.

Loan fees are based on the rate in effect on the loan’s disbursement date. A loan fee is typically deducted proportionately from each loan disbursement, and borrowers can also choose to have the fee added to their loan balance.

Loan fees change each October 1, based on the federal budget.

The most recent fees are shown in this table.

Loan limits on Federal PLUS Loans

Federal PLUS Loans have an annual limit equal to the college’s cost of attendance, minus other aid received. However, they don’t have aggregate loan limits. The student’s college determines how much parents can borrow through the Federal Parent PLUS loan and how much a graduate student can borrow through the Federal Grad PLUS loan.

Suppose the parent of a dependent undergraduate student is denied a Federal PLUS Loan. In that case, the student becomes eligible for higher unsubsidized Federal Stafford Loan limits, the same limits available to independent undergraduate students.

Since the Federal Parent PLUS Loan allows a parent to borrow almost unlimited amounts of money for their children, they must take care to avoid over-borrowing. Parents should borrow no more for all their children than their annual income. If the total Federal Parent PLUS Loan debt is less than the parent’s annual income, the parents should be able to repay the loans in 10 years or less. If retirement is less than 10 years away, they should borrow proportionately less money. For example, if retirement is in just 5 years, the parents should borrow half as much.

See also: Complete Guide to Parent Loans

How to Apply for Federal PLUS Loans

The Federal PLUS Loan is disbursed through the college financial aid office, so they administer the application process and determine the maximum amount you can borrow. They will ask you to complete a PLUS loan application at the Studentaid.gov website. You may be required to complete entrance counseling.

PLUS Loan borrowers will also have to sign a Master Promissory Note (MPN) at Studentaid.gov to obtain a Federal PLUS Loan. The Master Promissory Note is good for a continuous period of enrollment at a specific college for up to 10 years.

Loan Disbursement

The federal government sends Federal PLUS Loan funds directly to the college. The college financial aid office then applies the loan funds to tuition and fees (plus room and board if the student lives on-campus).

Any remaining credit balance is normally “refunded” to the student or parent within 14 days. (Parents can authorize the college to refund any leftover Federal Parent PLUS loan proceeds to the student). The 30-day delay for first-time, first-year borrowers does not apply to Federal Parent PLUS Loans. Federal PLUS loans are disbursed in two installments.

Loan Repayment

Repayment begins within 60 days of full disbursement. However, parents may request a deferment to delay repayment until the end of the six-month grace period after the student graduates or drops below half-time enrollment. Parents can also defer repayment if they themselves are enrolled at least half-time in college. Interest will accrue and will be added to the loan balance if it isn’t paid.

Repayment Options for Federal Direct Parent PLUS Loans

• Income-Contingent Repayment (ICR) only if the parent includes the loan in a Federal Direct Consolidation Loan after July 1, 2006. 
• Public Student Loan Forgiveness
• Standard 10-year repayment
• Extended Repayment
• Graduated Repayment

Repayment Options for Federal Direct Grad PLUS Loans

• All repayment plans, including all income-driven repayment plans

Transferring Direct PLUS Loans

Parents cannot transfer a Federal Parent PLUS loan to the student, unless they refinance with a private lender, giving up federal loan protections. However, nothing stops a parent and student from having a side agreement in which the student agrees to make the payments on the Federal Parent PLUS Loan. But, students need to be careful to avoid borrowing too much. 

Loan Cancellation

Federal Direct PLUS loans are eligible for discharge upon the death or total and permanent disability of the borrower. In addition, Federal Parent PLUS loans may be discharged upon the death (but not disability) of the student beneficiary.

Federal PLUS loans are also eligible for other loan cancellation provisions, such as the closed school discharge, identity theft discharge, bankruptcy discharge, unpaid refund discharge and false certificate discharge. They may be eligible for loan forgiveness, such as public service loan forgiveness, which requires working in a specific occupation for a specified period while repaying the loans.

Alternatives to the Federal PLUS Loan

If the student has exhausted eligibility for the Federal Stafford Loan, the alternatives to the Federal Direct PLUS Loan include private student loans and private parent loans . Generally, private loans require a creditworthy cosigner, which is usually the parent.

Pros and Cons of Federal Direct PLUS Loans

When considering the Federal Direct PLUS Loan compared to other borrowing options, here are some pros and cons you will want to keep in mind. 

Pros of Borrowing Direct PLUS Loans

• The loan limit isn’t limited like traditional federal student loans. You can borrow what you or your child needs up to the cost of attendance for that academic year, less any other financial aid.
• Your interest rate remains fixed for the lifetime of the PLUS loan. This helps you plan your repayment and not worry about any curveballs regarding what you owe.
• Parents can request a PLUS loan deferment while the student is in school, which offers more options for loan repayment.
• Parent PLUS loans are eligible for the standard repayment plan, or other flexible options such as the graduated or extended repayment plans. 
• A federal PLUS Parent loan may be eligible for the Income Contingent Repayment or Public Service Loan Forgiveness if consolidated into a Direct Consolidation Loan. 
• A Parent PLUS loan could also be eligible for Public Service Loan Forgiveness if consolidated into a Direct Loan.

Cons of Borrowing Parent Direct PLUS Loans

• Direct PLUS loans have higher interest rates than other federal student loans.
• Direct PLUS loan borrowers also pay an origination fee, which could make the loan more expensive than a private loan.
• Borrowers must undergo a credit check, and adverse credit history might limit eligibility. 
• Borrowers risk borrowing too much and going into default because Direct PLUS Loans don’t have strict limits (cost of attendance minus other financial aid received). 
• You must start paying parent loans back right away unless you request a deferment.
• The parent PLUS loan isn’t available to as many income-based repayment options.

Conclusion

The Federal Direct PLUS Loan is an excellent resource to cover additional educational expenses for grad school or your child’s undergraduate education, but you should consider whether the origination fee means it costs more than other options. 

Interested in exploring other student loan options? Check out our list of the best private student loans for 2022!