Uncategorized June 26, 2017

What Is A Parent PLUS Loan?

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It’s time to answer the burning question, “What is a Parent PLUS Loan?” To clear up any discrepancies, Parent PLUS Loans may also be called Federal Direct PLUS Loans, Direct PLUS Loans, or PLUS Loans – they all mean the same thing. Before reading any further, please take an opportunity to learn first about Unsubsidized Loans and then Subsidized Loans. It will make a lot more sense to you if you progress in this fashion. It is also important that you understand about Unsubsidized and Subsidized Loans because your decision as to whether you take one of these types of loans vs. a Parent PLUS Loan can save you thousands.

Who is eligible for a Parent PLUS Loan? As the name implies, parents can get this type of loan, but more specifically, parents of dependent undergraduate students. A Parent PLUS Loans is not available to parents of graduate students or students who can classify themselves as an independent. Parents of dependent children who are divorced are each separately eligible for Parent PLUS Loans; however, the total amount borrowed by both parents cannot exceed the loan limits set by the federal government (more about this later).  If you are unfamiliar with what a dependent is, read, What Are Dependents on the Turbo Tax website. Graduate students are able to take out Parent PLUS Loans (also called PLUS Loans) on their own.
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Where does the money come from? The money for Parent PLUS Loans comes from the federal government.

Why would I get a Parent PLUS Loan? If your student’s financial aid package falls short of covering all of their education costs for that year and you do not have the money to cover the remainder, you might consider a Parent PLUS Loan to cover the shortfall. It’s very important to know that a Parent PLUS Loan is taken out in the parent’s name only; therefore, the parent is legally responsible for repaying the loan. Even if you and your child have made an agreement that the student will repay the loan, should they default (not make payments), you are the one who will be held responsible.My child was approved for Federal Subsidized and/or Unsubsidized Loans but since I plan to be the one paying the loans back, should I get a Parent PLUS Loan instead? The interest for Unsubsidized and Subsidized Loans (currently 4.45% with an origination fee of 1.069%) is far better than the Parent PLUS Loan (currently 7% with a 4.27% origination fee). Therefore, it would be fiscally advantageous to have your child accept the Subsidized and/or Unsubsidized Loans first if they are part of your student’s aid package. With Subsidized and Unsubsidized Loans, just because your child takes out the loan in their own name does not prohibit you from being the one to pay it back if that is your plan. I’ve also had many parents tell me that they chose for their child to take out the loan in their own name so that they felt some responsibility to do well in school, with the plan to surprise their child by paying back the loans once they graduated.

Is there a credit check for Parent PLUS Loans? The simple answer is yes. To be more clear though, the credit check for this type of loan is different than the type of credit check for, let’s say, a car loan or mortgage. Here’s why…for most loans, the bank or lender will check your credit to debt ratio (a formula that compares your overall debt payments to your income) as well as your credit score – they want to know very clearly how much money you have coming in and going out each month to determine if you can afford the loan payments. A credit check for a Parent PLUS Loan only checks for adverse credit history. Basically, unless you have some really bad dings in your credit history, you will be approved for a Parent PLUS Loan. But, because they are only looking for adverse credit history for loan approval, it is important to understand that the amount you are approved for isn’t necessarily how much you can afford to pay back. In the approval process for a Parent PLUS Loan, they do not take into consideration what your income is or how much debt you already have. According to US News:

If you are trying to determine if your household budget can manage the Parent PLUS payments, a good rule of thumb is to assume about $120 a month for every $10,000 borrowed. Multiply that by the number of years the degree should take and by the number of children expected to pursue college. If you are borrowing just $10,000 per year and have two children pursuing four-year bachelor’s degrees, you can expect a payment of almost $1,000 per month for the next 10 years.

What if you are denied approval for a Parent PLUS Loan? If you are denied approval for a Parent PLUS Loan, you have two options; you can ask someone with qualifying credit to endorse the loan for you (this cannot be the student) or you can appeal. Once a denial is issued, if you are not going to attempt either of these two options, be sure to let the financial aid office know because, at this point, your child/college student becomes eligible to borrow the same amount in Unsubsidized Loans as an independent student can. Basically, the student will be approved to borrow more money in the form of a Federal Unsubsidized Loan. Limits for Unsubsidized Loans given to dependent vs. independent students can be found here. 

How much can be borrowed in the form of Parent PLUS Loans? The total amount you can borrow each year is the shortfall, or amount leftover when you take the total cost of attendance (determined by the school) minus any other aid your student receives. Therefore, the amount you can borrow in the form of a Parent PLUS Loan can differ from year to year but there is no cumulative limit. 

How do I get a Parent PLUS Loan? The process for getting a Parent PLUS Loan can differ from school to school but all begin with filling out the FAFSA (an acronym that stands for Free Application For Federal Student Aid). Some schools will include your Parent PLUS Loan in your student’s aid package, some schools require you to contact the financial aid department to request a Parent Plus Loan, and some require you to go to StudentLoans.gov to request the loan. Contact your student’s financial aid office to understand the process they use and be sure to note any deadlines.

When do I have to repay a Parent PLUS Loan? You begin to repay a Parent PLUS Loan (principal plus interest) sixty days after the loan money is dispersed (given out). You can request a deferment (a hold on repayment) while your child is still in school plus a six-month grace period after they graduate. The deferment is requested during the application process.

If you choose to defer payment until after graduation, interest will accrue (add up) while you student is still in school. If you cannot afford to repay the loan while your student is still in school, it is still wise to pay the interest payments during that period if you can. This is to avoid capitalization of your interest. Simply put, capitalization of your interest means that once it is time to pay back the loan, the amount you now owe includes the interest that has added up (accrued) over the time you have had the loan. You will have to pay interest on the interest!

How are you financing your child’s education? What advice do you have for others? Leave your comments below. Also, please join us on Facebook, Parenting Your College Student.