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Parent Loans

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Parents of dependent students can take out loans to supplement their children's aid packages. The federal Parent Loan for Undergraduate Students (PLUS) lets parents borrow money to cover any costs not already covered by the student's financial aid package, up to the full cost of attendance. There is no cumulative limit. Since July 1, 2010, all new PLUS loans, like the Stafford loans, have been made through the Direct Loan program (funds provided by the government).

Parent PLUS loans are the financial responsibility of the parents, not the student. If the student agrees to make payments on the PLUS loan, but fails to make the payments on time, the parents will be held responsible.

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Starting on July 1, 2006, graduate and professional students can borrow money through the PLUS Loan program to pay for their own education.

These days the PLUS loan is referred to as either the Parent PLUS or Grad PLUS loan. The original name, Parent Loan for Undergraduate Students, is no longer used, not even in the Higher Education Act.

Switch from FFELP to Direct PLUS Loans

The Health Care and Education Reconciliation Act of 2010 ended the FFEL program, where loan funds were provided by private lenders such as banks and other financial institutions. The lenders still hold their existing FFEL program loans, but are no longer involved in making new loans. Since July 1, 2010 all new federal education loans are made through the Direct Loan program, where the federal government provides the funds for the loans through the colleges.

This change includes the PLUS loans, not just Stafford and Consolidation loans, so parents who want a Parent PLUS loan should contact the financial aid office at their child's college.

Interest Rates and Fees

PLUS loans through the Direct Loan program have a fixed interest rate of 7.9%. This rate has been in effect since July 1, 2006. (Previously, PLUS loans had variable interest rates (based on 52 week T-bill rate + 3.10%) capped at 9%.)

The 7.9% interest rate on the Direct PLUS loan is a lower interest rate than the interest rate that was available through the FFEL program, which had a fixed rate of 8.5%. (Some lenders offered discounts for on-time and electronic payment.) So the switch to Direct Loans will save parents some money on new Parent PLUS loans.

Note that existing FFEL program PLUS loans will continue to have the same 8.5% interest rate as they did before July 1, 2010. The switch to the Direct Loan program does not affect existing loans.

The interest on the PLUS loan is not subsidized while the student is in school, unlike the subsidized Stafford and Perkins loans.

The PLUS loan charges loan fees of 4%, deducted from each disbursement check.

Repayment

Repayment begins 60 days after the funds are fully disbursed, and the repayment term is up to 10 years.

Graduate students may defer repayment on Grad PLUS loans while they are in school. However, there is no six-month grace period as there is with the Stafford Loan program.

Parents have the option of deferring repayment on Parent PLUS loans while the undergraduate student on whose behalf they borrowed the PLUS loan is in-school and for a six-month grace period after the student graduates or drops below full-time enrollment. This change was enacted by the Ensuring Continued Access to Student Loans Act of 2008 (PL 110-227), ECASLA, and is effective for Parent PLUS loans first disbursed on or after July 1, 2008. (Payments can also be deferred if the parents are themselves enrolled in college. They will need to submit an application for an in-school deferment.)

(Before ECASLA added the deferment option on the Parent PLUS loan, some lenders allowed parents to defer payments on the PLUS loan while the student is in school by granting one of several types of forbearances. In each case the forbearance allows a full or partial suspension of payments for up to a year at a time. The discretionary forbearance can be renewed each year; the economic hardship deferment and excess debt burden forbearances each have a three-year time limit. The deferments and forbearances are still available for all Parent PLUS loans, especially the ones originated before July 1, 2008.)

Note that since the interest on the PLUS loan is not subsidized, it continues to accrue while defered or in forbearance and is capitalized when the loan enters repayment.

Consolidating PLUS Loans

PLUS loans can be consolidated just like Stafford and Perkins Loans, although a parent's PLUS loan cannot be consolidated with the student's Stafford and Perkins Loans, since the borrowers are different. But parents who have their own Stafford loans can consolidate them together with any PLUS loans they have borrowed to pay for their children's education.

Consolidating PLUS loans provides access to alternate repayment terms, such as extended repayment, graduated repayment, and income contingent repayment. (Income contingent repayment is available for Direct Grad PLUS loans but not Direct Parent PLUS loans.)

Note that since the consolidation loan has an interest rate that is capped at 8.25%, consolidating a FFELP PLUS loans can reduce the interest rate by 0.25%. It is best to consolidate PLUS loans separately from Stafford and Perkins Loans to maximize the benefit of this interest rate reduction. However, one should also consider the impact of consolidation on available education loan discounts.

Eligibility

Eligibility for the PLUS loan depends on a modest credit check that determines whether the parent as an adverse credit history. An adverse credit history is defined as being 90 or more days late on any debt or having any Title IV debt (including a debt due to grant overpayment) within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off. The Ensuring Continued Access to Student Loans Act of 2008 extended the 90 days late threshold to 180 days for mortgage payments and medical bill payments during calendar years 2007 through 2009.

If a dependent student's parents are denied a PLUS loan, or the college financial aid administrator determines that the parents are likely to be denied a PLUS loan, the student becomes eligible for increased unsubsidized Stafford Loan limits, the same limits as are available to independent students. Only one parent needs to apply for and be denied a PLUS loan. However, if one parent is denied a PLUS loan and the other is approved for a PLUS loan, the student is not eligible for increased Stafford Loan limits.

It is generally a good idea for parents who think they might be denied a PLUS loan or have other exceptional circumstances that prevent them from using the PLUS loan program to talk to the school before applying for a PLUS loan. If they happen to obtain a PLUS loan approval it makes it much more difficult for the school to grant the student the additional unsubsidized Stafford loan eligibility. The specific language at 34 CFR 682.201(a)(3) is:

For purposes of a dependent undergraduate student's eligibility for an additional unsubsidized Stafford loan amount, as described at 34 CFR 682.204(d), is a dependent undergraduate student for whom the financial aid administrator determines and documents in the school's file, after review of the family financial information provided by the student and consideration of the student's debt burden, that the student's parents likely will be precluded by exceptional circumstances (e.g., denial of a PLUS loan to a parent based on adverse credit, the student's parent receives only public assistance or disability benefits, is incarcerated, or his or her whereabouts are unknown) from borrowing under the PLUS Program and the student's family is otherwise unable to provide the student's expected family contribution. A parent's refusal to borrow a PLUS loan does not constitute an exceptional circumstance.

If the dependent student receives the additional unsubsidized Stafford loan eligibility and the parent subsequently receives a PLUS loan, the student will not receive any subsequent disbursements on the additional unsubsidized Stafford loan but may retain any amounts already disbursed. Subsequent Stafford loan disbursements revert to the lower unsubsidized Stafford loan limits without considering any excess amounts received under the higher unsubsidized Stafford loan limits. The annual cap on the PLUS loan must consider the total amount of Stafford loan disbursements under the cost-of-attendance minus aid received cap.

Applying for a PLUS Loan

Graduate and professional students who are applying for a PLUS loan must submit the Free Application for Federal Student Aid (FAFSA) and sign a master promissory note.

Parents who are applying for a Parent PLUS loan are, strictly speaking, not required to have the student file a FAFSA. However, it is generally advisable to do so in order to avoid missing out on other federal student aid. But if they wish to apply for a Parent PLUS loan without submitting a FAFSA, they will need to submit a loan application and sign a master promissory note.

Starting in 2011-2012, the FAFSA will be required for the Parent PLUS loan. Currently about 98% of families borrowing from the Parent PLUS loan already file the FAFSA.

(The usual requirements for student and parent eligibility still apply, per 34 CFR 682.201(c). For example, the student must be enrolled at least half-time and be eligible for federal student aid. Both the parent borrower and the student must be US citizens, nationals or eligible noncitizens. Neither the student nor the parent borrower can have a federal government judgment lien on his or her property. The parent cannot owe an overpayment on a federal education grant or be in default on a previous federal education loan unless he or she has made satisfactory arrangements to repay the grant overpayment or loan. The student is required to be registered with Selective Service, but the parents are not. Colleges are required to determine eligibility for both the dependent student and the parent before certifying a Parent PLUS loan. Besides obtaining the student's complete financial aid history, the school may also have supplemental forms for the parent to complete, such as signing a statement of educational purpose.)

If the student's parents are divorced, both the custodial parent and the noncustodial parent are eligible to borrow from the PLUS loan program, provided that the combined amounts borrowed do not exceed the cost-of-attendance minus aid received cap. A stepparent who has not adopted the student can only borrow from the PLUS loan program for as long as he or she is married to the custodial parent (i.e., the stepparent's income and assets would be considered when calculating the dependent student's expected family contribution). A stepparent who is married to the dependent student's non-custodial parent is not eligible to borrow from the PLUS loan program. Legal guardians are not eligible to borrow from the PLUS loan program, nor are aunts, uncles and grandparents. See 34 CFR 682.201(c)(3) and 34 CFR 668.2 "parent".

Borrow the Stafford Loan First

The Federal Stafford loan has a lower interest rate than the Parent PLUS loan (6.8% or less, compared with 7.9%) so families should exhaust Stafford loan eligibility before turning to the Parent PLUS loan. The unsubsidized Stafford loan is available without regard to financial need, just like the Parent PLUS loan, so you do not need to be poor to qualify for this loan.

Unfortunately, many families do not take full advantage of the Stafford loan. In 2007-08, 8.2% of students whose parents borrowed from the Parent PLUS loan program did not borrow from the Stafford loan program, and 33.2% borrowed less than the maximum total amount available from the Stafford loan program. Nothing prevents parents from helping their children with the payments on their Stafford loans, and the lower interest rate will save money, so it is best to borrow the Stafford loan first.

Finding a PLUS Loan Lender

As noted above, since July 1, 2010 all new federal education loans, including the PLUS loan, are made through the Direct Loan program. To obtain a Parent PLUS loan, contact the college's financial aid office.

The PLUS loan borrower will need to sign a Master Promissory Note (MPN), which covers a period of continuous enrollment. Annual borrowing is capped at the cost of attendance minus other aid. The college will draw down the funds from the Common Origination and Disbursement (COD) system and deposit them into the student's account. After the funds are applied to tuition and fees (and with the family's permission, room and board), any remaining funds will be disbursed to the student to pay for textbooks and other college-related costs.

(Lenders that participated in the FFEL program can be found in the Lender Codes Database. FinAid also maintains a list of education lenders who offered federal and private education loans, including PLUS loans.)

Parents who are considering a PLUS loan also often consider a home equity loan or an alternative loan. There are several tradeoffs between these options.

 

 
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