Parent Plus Loans for College Costs
As college costs continue to rise, many families look for ways to bridge the financial gap left by other forms of financial aid. One option to consider is Parent PLUS loans.
Parent PLUS loans, offered through the Department of Education’s William D. Ford Federal Direct Loan Program, can help parents cover their child’s college expenses.
Understanding the Basics of Parent PLUS Loans
Parent PLUS loans are designed to help parents of dependent undergraduate students afford college.*
These loans can cover the difference between a student’s total cost of attendance and the other financial aid they received, including grants and federal loans.
Once approved, the Department of Education sends the loan money straight to your child’s school to pay for tuition, fees, and room and board. If there’s any money left over, the school will give it to your child to cover other allowable expenses.
*Unfortunately, if you’re a grandparent or another student’s relative, you can’t get a parent PLUS loan unless you legally adopt the student.
Parents, Not Students, Take Out the Loan
Unlike other federal loans in the student’s name, parent PLUS loans are taken out in the parent’s name, making the parent responsible for repaying the debt.
Some families have an informal arrangement where the child gives money to the parent, who then makes the loan payments. However, this agreement might not always work out in practice.
Interest Rates & Fees for Parent PLUS Loans
One disadvantage of Parent PLUS loans is that of all federal options, they carry the highest interest rate.
The interest rates for Parent PLUS loans are fixed and determined by when the loan is first disbursed. For loans issued between July 1, 2024, and July 1, 2025, the rate is set at 9.08 percent. Additionally, a loan origination fee of 4.228 percent is deducted before disbursement.
While these rates are higher than those for Direct Subsidized and Unsubsidized Loans, the key advantage of Parent PLUS loans lies in their federal borrower benefits.
“Despite their higher interest rates and fees compared to other federal student loans, Parent PLUS loans come with significant benefits such as flexible repayment plans and access to federal borrower protections,” says Nicholas Jembelis, Senior Vice President, Investments at David Lerner Associates, Inc.
Eligibility Criteria for Parent PLUS Loans
To qualify for a Parent PLUS loan, parents must meet certain criteria:
- Be the biological, adoptive, or, in some cases, step-parent of a dependent undergraduate student enrolled at least half-time at a qualifying school.
- You must meet general student loan eligibility requirements, such as being a U.S. citizen or eligible non-citizen with a valid Social Security number.
- We do not have an adverse credit history, which the DoE defines as 90 or more days delinquent on debt or having faced financial issues like loan default, repossession, foreclosure, or bankruptcy in the past five years.
A Step-By-Step Guide to Applying for a Parent PLUS Loan
The application process for a Parent PLUS loan involves a few steps:
- Fill Out the FAFSA: Ensure your child completes the Free Application for Federal Student Aid or FAFSA. This form lets you and your child provide crucial details about your finances, which helps determine the aid your child may be eligible for. You’ll be required to complete and submit the FAFSA by a specific deadline.
- Fill out the Parent PLUS Loan Application Form: You’ll need details such as the loan amount requested, your child’s school information, and your financial information. Once you have all the required info, apply online at StudentAid.gov, sign in with your FSA ID, and complete the Direct PLUS Loan Application.
- Sign the Repayment Agreement: After finishing the application and getting approval, you’ll sign the Master Promissory Note, similar to other federal student loans. This legally binding agreement outlines your repayment obligations.
Flexible Repayment Plans
Parent PLUS loans offer different repayment options, allowing parents to choose the plan that best suits their financial situation:
- Standard Plan: Fixed monthly payments over ten years.
- Graduated Plan: Payments start low and increase every two years over ten years.
- Extended Plan: For those with at least 30k in debt, payments can be made over 25 years, with either fixed or graduated payments.
What Happens If You Fail to Repay A Parent PLUS Loan?
If you miss a payment on a parent PLUS loan, it becomes delinquent the next day and stays delinquent until payments resume or deferment is arranged. After 90 days of delinquency, the loan is reported to credit bureaus, harming your credit score.
After 270 days, the loan defaults, making the full balance due immediately. This can lead to wage garnishment and withholding of tax returns or federal benefits.
Defaulting severely impacts your credit score for up to seven years. Even if you and your child agreed they’d make the payments, the parent is ultimately responsible.
Loan Forgiveness & Relief Options
Parents can access loan forgiveness through:
- Public Service Loan Forgiveness (PSLF): Forgives the remaining loan balance after 120 qualifying payments while working full-time for a qualifying employer. Consolidation into a Direct Consolidation Loan and enrollment in the ICR Plan are required.
- Income-Contingent Repayment Plans: The ICR plan can lower your monthly payments to either 20 percent of your discretionary income or the amount you’d pay on a 12-year fixed repayment plan, adjusted for your income. To qualify, you must consolidate your loans.
- Deferment/Forbearance: During unemployment, financial difficulties, or other special situations, you might qualify for deferment or forbearance to temporarily pause your monthly payments. The options will differ based on your specific circumstances.
- Discharge Under Some Other Circumstances: You may qualify for loan discharge if you’re permanently disabled or the student passes away. It may sound grim, but it’s important to know that in such situations, the debt won’t be a burden during a crisis, and any remaining balance won’t affect your estate.
Parent PLUS loans offer a valuable option for families needing to cover college costs. With the right information and planning, these loans can be a strategic part of financing your child’s education.
For personalized guidance on managing Parent PLUS loans and exploring your financial options, contact David Lerner Associates. Our experienced advisors are here to help you make informed decisions and optimize your financial strategy. Reach out today to start planning for your child’s educational future.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.