Many parents assume that in order to help pay for their child’s college tuition and other related expenses, they’ll need to start saving early on. But while that can be a useful strategy, it’s not the only way to help fund a college education.
Parent PLUS loans are a type of federal student loan available to parents who want to help pay for their child’s education. Read below for more information.
What are Parent PLUS Loans?
Currently, there are two types of federal student loans: Direct Loans and PLUS loans. Direct Loans are available to undergraduate and graduate students, while PLUS loans are available to graduate and professional students and parents.
Parent PLUS loans are the only federal student loan option available for parents of students. You can only take out a Parent PLUS loan if your child is an undergraduate student
The main difference between Direct Loans and Parent PLUS loans is that Direct Loans have a relatively low annual and aggregate limit. Students can only take out between $5,500 and $7,500 a year in Direct Loans, with a total loan limit between $31,000 and $57,500.
The limit for Parent Plus loans is the annual cost of attendance minus any other financial aid, including other student loans, grants, work-study and scholarships. That means a parent can borrow much more in Parent PLUS loans than their child could in Direct Loans.
Interest rates on Parent PLUS loans are higher than interest rates for Direct Loans. For the 2022-23 school year, the interest rate is 3.73% for Direct Loans for undergraduates, 5.28% for Direct Loans for graduate students and 6.28% for Parent PLUS loans.
There is no credit or income threshold to qualify for a Parent PLUS loan. The federal government will run a basic credit check and look for any adverse events on your credit report. You may be denied a Parent PLUS loan if you’ve had any of the following in the past five years:
- Loans that are 90 days late
- Foreclosure
- Repossession
- Liens
- Wage garnishment
- Bankruptcy
- Loan default
If you do have an adverse event on your credit report, you can ask someone to act as an endorser on the loan, which is similar to a cosigner. The endorser will agree to take over payments if you default. You can also write a letter to the college financial aid department explaining the adverse event and asking them to reconsider.
While students have access to five income-driven repayment (IDR) options, parents can only use the income-contingent repayment (ICR) plan. ICR plans have the highest monthly payment compared to all other IDR plans. To be eligible for ICR, you have to consolidate the loan as a Direct Consolidation Loan.
Parents do have access to the Public Service Loan Forgiveness (PSLF) program that will forgive any remaining loan balance after making 120 eligible payments. To qualify for PSLF, you must work full-time for an eligible employer like a government organization or qualifying non-profit. The employment requirement depends on the parent’s place of work and not the child’s.
Many parents borrow Parent PLUS loans with the understanding that their child will make payments after they graduate – but the child is not legally obligated to comply. If a Parent PLUS borrower stops making payments, it will be their credit score that is impacted and not the child’s.
Are Parent PLUS Loans Dangerous?
Because Parent PLUS loans have higher loan limits than private student loans, it can be easy for parents to take on more debt than they can handle. If parents use Parent PLUS loans for multiple children, they can easily wind up with six figures in student loans.
Before taking out a Parent PLUS loan, look at your income and expenses to determine how much you can afford to borrow. Use the official loan simulator to see how much your monthly payments would be and determine if you can afford that amount.
Alternatives to Parent PLUS Loans
Don’t want to take out a Parent PLUS loan but still want your child to get a good education? Read below for the best alternatives:
Direct Loans
Students are not required to max out their own federal loans before their parents take on Parent PLUS loans. If your child hasn’t reached their Direct Loan limit, encourage them to do so before borrowing Parent PLUS loans.
Grants and scholarships
Students should also apply for as many grants and scholarships as possible. They can use third-party sites like Scholarships.com, Fastweb and Cappex. Students can sign up for an account on these sites and be notified when a potential scholarship opportunity is posted.
Colleges also have their own list of internal awards. Students should talk to their academic advisor about where to find these scholarship opportunities.
Many students think that applying for scholarships is only something they should do when they’re incoming freshmen, but there are plenty of awards for upperclassmen. Students should keep applying for scholarships throughout their academic career.
Funding U
Parents who don’t want to take out Parent Plus loans can encourage their children to apply for a loan through Funding U. Funding U offers private student loans that don’t require a cosigner.
Students can apply for a Funding U loan by themselves without their parents. Funding U uses a student’s GPA, current major and projected future income to determine eligibility. Students need a 2.5 GPA or higher to qualify.
Disclaimers
