How Do Parent PLUS Loans Work?
When families fill out the FAFSA, one of the options offered for funding are Parent PLUS loans. These loans are meant to supplement school, state, and other federal financial aid offered. Filling out the FAFSA is the first step. A credit assessment is performed to determine any late payments and recent defaults.
Then, parents fill out a promissory note from the school itself. The form may be downloaded from the school’s financial aid office webpage or given to parents another way. You’ll want to contact the school for their individual procedure.
Parent Plus Loans are awarded for up to the full cost of attendance minus other financial aid students received. Funds are sent directly to the school. Refunds for amounts beyond what is owed to the school are sent to the parent or to the student with the parent’s permission.
Important note: Parents don’t have to borrow the full amount offered. For instance, families may decide to pay some of the money offered in the form of PLUS loans with one or a combination of installment plans from the college, tax credits, student income, their own income, and private loans.
Summary of how Parent PLUS Loans work
- Applying for Parent PLUS loans starts by filling out the FAFSA.
- The next step is downloading a promissory note from the school financial aid website.
- The approved loan amount can be up to the full cost of attendance minus other forms of financial aid.
- Parent PLUS loans aren’t an all or nothing game. You can choose to borrow part of the amount offered and find other sources for the remaining cost of attendance.
Parent PLUS loan eligibility requirements
The eligibility requirements for a Parent PLUS loan are fairly simple. You must be the biological or adoptive parent of a dependent undergraduate student enrolled at least half-time. You generally must meet minimal credit standards, and the student must meet general eligibility requirements for financial aid.
Student eligibility requirements are also straightforward. Students must be a U.S. citizen or eligible non-citizen, and not have previous student loan defaults that haven’t been resolved or consolidated into a federal direct loan. Male students who are citizens and age 18 to 25 need to register for the Selective Services. Parents also must be U.S. citizens or eligible non-citizens.
If you don’t qualify, there are alternative ways to get funding that the federal government supplies.
Here’s what you need to know about the credit requirements for a Parent PLUS Loan:
In the two years before the date your credit is pulled:
You can’t have one or more debts that are more than 90 days overdue that total more than $2,085. You also can’t have a collection or charge off.
In the five years before the date your credit is pulled:
You can’t have a loan default, a discharge of debts in bankruptcy, foreclosure, repossession, tax lien, wage garnishment, or a write-off of a federal student aid debt.
Your options for getting Parent PLUS loans with bad credit
If your credit needs improvement, you may still be able to get a Parent PLUS loan by providing documentation and getting approved because of extenuating circumstances. You can also get approved by getting a friend or family member with better credit to be an endorser.
Extenuating circumstances could be a variety of reasons that show that what is listed on your credit report doesn’t accurately describe your true ability to repay the loan. For instance, a divorce decree showing you aren’t required to pay the debt or proof you’ve been making payments on the debt in question for at least 6 months. Excessive medical bills that you can document is another potential circumstance that could impact the Department of Education revising their decision.
No matter what the reason behind the extenuating circumstances, documenting any situation is important. And of course, make sure you are able to show how the situation has improved.
Note: Grandparents and legal guardians aren’t eligible for parent PLUS loans, unless they legally adopt the student.
How adding an endorser works
An endorser is the federal government’s term for a cosigner, a person who’s willing to be a co-borrower on the loan, so the person whose credit might not be established yet or may not be as good, can borrow the money.
Pros and cons of getting an endorser:
Pro: You’ll get the rest of the money needed for your student’s cost of attendance for that school year.
Con: You may not be able to afford the amount you are approved for.
Pro: You’ll have time to improve your credit before borrowing for future years.
Con: You’re asking another person to be responsible for the loan in addition to you this year. However, you can make a decision to prioritize paying off this loan first.
Pro: If the endorser has good enough credit, you may also be able to have them cosign a private student loan instead. Then you can remove their name from the private loan, provided you meet rules for cosigner release.
Con: Having enough income to afford repayment is not a requirement. Whether or not you are approved, especially with an endorser, has nothing to do with affordability.
If you are approved because of extenuating circumstances or because of an endorser, expect to complete PLUS loan credit counseling. It usually takes 20 to 30 minutes total and must be completed in one sitting.
When your student can get approved for extra student loans
Be cautious of getting an endorser if rejected for Parent PLUS loans. A dependent student whose parents don’t qualify for PLUS loans can receive up to $9,500 in loans instead of $5,500. This may not be enough to cover all expenses. That’s when families may want to consider transferring to a more affordable school or getting an endorser on a federal loan or cosigner on a private one.
Parent PLUS loan eligibility summary
- Families are eligible for Parent PLUS loans if the parent doesn’t have adverse credit history, the student is in college at least half-time, and both the student and the parent meet general federal student loan eligibility requirements.
- Adverse credit history has two different sets of standards based on whether the debt is within two years or within five years.
- Not getting approved based on adverse credit history can be challenged via documented extenuating circumstances that show the Department of Education why you had credit issues and why you are now credit worthy.
- Adding an endorser, the federal government’s version of a cosigner with better credit, may help you get approved. The endorser will be as legally responsible for the loan as you are.
- If you are rejected for Parent PLUS loans, your student may be eligible for more student loans at a lower interest rate. The only difference is it may not be for as much money, and your student could still have to find other methods for filling remaining financial aid gaps.
Parent PLUS Loans Interest Rates
Parent PLUS loan rates may be a shock to families who are used to paying rates for undergraduate federal student loans. While undergraduate loans to students are currently issued at a rate of roughly 4.5%, rates for Parent PLUS loans are roughly 7.1%.
Now think about how much more you can borrow with a Parent PLUS Loans versus a traditional undergraduate student loan. While federal student loans are generally capped for dependent students at $31,000 for entire undergraduate degree, Parent PLUS loans are capped by the total cost of attendance minus other sources of financial aid.
Is there any way to reduce the interest rate on education loans issued to parents?
Yes. While it’s generally encouraged to borrow federal student loans before private loans, PLUS loans are a bit different because of the likelihood of getting a lower interest in the private market if you have good credit.
Generally, private student loans don’t have an origination fee, a fee to borrow the loan on top of interest. Parent PLUS loans, however, do. This fee is charged even if you pay off the loan the same day. While a 1.1 percent fee that is charged on federal undergraduate student loans may be barely noticeable, the current origination fee is 4.2 percent – about 4 times the rate students pay.
Do Parent PLUS Loan rates ever decrease?
Yes. They are over a half percent lower for the 2019 / 2020 academic year than they were for last year. Interest rates and origination fees can change on July 1 each year. That means interest rates and fees could be different each year you borrow.
Once issued, the interest rate is fixed and never changes. The only time it does is if you receive the 0.25 percent discount for automatic monthly payments.
Is Parent PLUS loan interest ever subsidized by the Department of Education?
No. Subsidized student loans are education loans where the Department of Education pays the interest on the loan while the student is in school and certain economic and other circumstances. This loan type is only available to students who meet the financial need criteria.
Summary on Parent PLUS loan interest rates
- Parent PLUS loan interest rates are much higher than interest rates for student loans. Currently, the difference is over 2 percent.
- Private student loans issued to parents or students may have a better interest rate than PLUS loans. Parents with good credit should comparison shop.
- An origination fee is an additional charge on top of the interest rate. The current fee is over 4 percent. Generally, private student loans don’t add this expense to borrowing costs.
- Interest rates can be lower or higher for new Parent PLUS loans in future years. Rates can change, up or down, every year on July 1.
- Once issued, interest rates don’t change with the exception of a .25 discount for direct debit.
Parent PLUS Loans Repayment Options
One of the biggest perks to Parent PLUS loans is that some of the same repayment plans available on federal student loans also apply for parents.
Here’s what you need to know about your Parent PLUS repayment options:
When payment begins
Parent PLUS loans are approved on an annual basis, but they are distributed based on school terms such as quarters or semesters. Without asking for a deferment, a payment break for in-school status and other economic circumstances, repayment begins after the final disbursement for that academic year.
Parents can request deferment for each academic year while their student is enrolled at least half time. Upon graduation or separation from school, parents get the same six-month grace period as a student borrower does before payments start. In other words, if a student graduates in May, the first payment on the Parent PLUS loan would not be due until November.
Interest accrues while the student is in school, but parents can choose to pay the interest as they borrow. However, if Public Service Loan Forgiveness—partial forgiveness based on working for public service employers—is a possibility, paying down interest just reduces the amount that can be forgiven post-graduation. That said, it’s important to read up on loan forgiveness programs. They are by no means a guarantee!
The repayment plans you can qualify for without income verification
Without income verification, you can qualify for either a standard 10-year repayment plan, an extended repayment plan, or a Parent PLUS consolidation loan. Consolidation means you are combining all of your loans into a single loan. Then, you can potentially choose a repayment plan for up to 30 years to keep payments low. While payments may be lower, keep in mind you’ll actually be paying more over the life of the loan if you extend the term.
Example of how much these three types of payment plans could cost you:
Let’s say you borrow $60,000 in Parent PLUS loans over the course of four years with average interest rate of 7.1 percent. The payment on a 10-year standard repayment plan is $700 monthly. If you up the payment time to 25 years on an extended repayment plan, the payment drops to $428. On a Parent PLUS loan consolidation repayment plan for 30 years, payments could be around $400.
Remember, you can always repay student loans early without penalty, so it doesn’t hurt to choose a longer, more affordable repayment option and make extra payments. It’s very common for borrowers to send in just a few extra dollars monthly to reduce the balance and the interest charged. Ten dollars per month or more added to your monthly payment can reduce months to years off your total repayment time frame.
Note: Consolidation is a term for combining all loans into one loan, generally after graduation or the student’s graduation. You can choose other plans for repayment such income-driven ones after you consolidate your loans.
The plans you can qualify for with income verification
The income-driven repayment plan available to parents is called the income-contingent plan. The payment can be higher than other plans available to students BUT it still allows you to make lower monthly payments if you qualify and you may also be eligible for the Public Service Loan Forgiveness program after 10 years of on-time payments.
In order to qualify for the income-contingent plan, it’s best to consolidate Parent PLUS loans to one federal direct loan after you finish all borrowing for your student or students.
How Public Service Loan Forgiveness works
It is possible to get some Parent PLUS loan forgiven via the Public Service Loan Forgiveness (PSLF) program when choosing the income-contingent plan, provided the plan is still available when you finish borrowing.
The additional qualification for PSLF is based on your employment. To get an idea as to whether you could qualify, call the number on the PSLF employer certification form.
Economic breaks for payment
In addition to income-contingent and deferment options, parents can qualify for temporary breaks from payments called forbearance in case of economic difficulty for variety of reasons. Approval is generally up to the servicer of your loan or loans.
Transferring Parent PLUS loans isn’t possible.
You can’t transfer responsibility of Parent PLUS loans to students. If the goal is to have the student ultimately be responsible for the debt, consider cosigning a private student loan for them. Most private student loans have a cosigner release where you can be removed after the student makes 12 to 24 on-time payments.
Parent PLUS loan consolidation
There are also options to consolidate your PLUS loan with a private company or bank. Only consider offers where the interest rate is lower, you can afford the payment, and if you have zero chance of qualifying for PSLF.
That said, be wary of advertisements or phone calls that seem too good to be true – like wiping out your debt altogether. Do your homework and only call numbers listed on a reputable lender’s website and perform a web search to make sure it isn’t part of an identity theft scam to gather your personal information.
Repayment plan options summary
- Parent PLUS loan repayment begins 60 days after final disbursement for that academic year. Disbursements are made based on school terms.
- If parents are approved for deferments each year, repayment may not begin until 6 months after the student’s graduation.
- Parents must consolidate their loans to have a chance at qualifying for Public Service Loan Forgiveness.
- The income-contingent repayment plan is the income-driven repayment option available for parents.
- The student can’t take officially over the loan.
Summary of Sallie Mae’s Guide to Parent PLUS Loans
Parent PLUS loans are federal student loans issued directly to parents.
- Applying for Parent PLUS loans starts with filling the FAFSA.
- Schools will also require filling out a promissory note for Parent PLUS loans.
- The approved loan amount is not based on how much you can afford. Loan amounts can be up to the full cost of attendance minus other forms of financial aid.
- Parent PLUS loans aren’t an all or nothing game. You can borrow part of the amount offered and find other sources for the remaining cost of attendance. For instance, the student can get a part time job or apply for more scholarships to potentially reduce borrowing.
- Families are eligible for Parent PLUS loans if the parent doesn’t have adverse credit history, the student is in college at least half-time, and both the student and the parent meet general federal student loan eligibility requirements such as citizenships or being an eligible non-citizen.
- There are ways to fill funding gaps if rejected due to adverse credit history. You can dispute approval if you document extenuating circumstances or get an endorser. The student can seek more student loans at a lower interest rate if you’re rejected for Parent PLUS loans.
- An endorser is the federal government’s version of a cosigner with better credit. The endorser will be as legally responsible for the loan as you are.
- Parent PLUS loan interest rates are higher than federal student loans.
- Private student loans issued to parents or students may have a lower interest rate than PLUS loans. Parents with good credit should comparison shop.
- Origination fees are additional fees charged on top of the interest rate for Parent PLUS loans. Generally, private student loans don’t add this expense cost.
- Interest rates can change, up or down, for the following academic year on July 1.
- Payments can be postponed until after the student graduates by requesting and obtaining a deferment each year. In this case, payments can begin 6 months after the student graduates.
- Parent PLUS loans aren’t transferable to students.