What You Need to Know About Direct PLUS Loans

Direct PLUS loans, for graduate students and parents of college undergrads, are a useful last-resort federal loan option.
Loans, Student Loans
Expert Advice: What You Should Know About Direct PLUS Loans

Direct PLUS loans, used by parents and grad students to pay for college, differ from the typical direct loans for undergraduates in key ways. These federal student loans carry higher interest rates and have additional requirements and fees. But if PLUS loans are right for you, they may be a valuable addition to your mix of financial resources to pay for college.

What is a direct PLUS loan?

The direct PLUS loan is a federal student loan that can be taken out by parents to help pay for their child’s college education, or by graduate and professional degree students. To qualify you’ll need to file a Free Application for Federal Student Aid, or FAFSA.

When should you take out direct PLUS loans?

Direct PLUS loans should be used only to cover gaps in college expenses not filled through grants, scholarships, work-study, other federal student loans or out-of-pocket funding such as savings, income or gifts.

Though direct PLUS loans can help families cover the full cost of their child’s education, they aren’t always the best option for parents to take on. Ann Whitmer, a former financial aid director at Michigan’s Albion College, highly encourages students “to take out loans in their name first, as they are the beneficiary of the education and tend to take their college experience a little more seriously if they are contributing to paying their way.”

How much can you borrow?

The maximum amount you can borrow is the cost of attendance, as determined by the school, minus any other financial assistance. To determine the amount in PLUS loans available for you to borrow, fill out the FAFSA. If you need direct PLUS loans for more than one year, you’ll need to file a renewal FAFSA each year.

What are the rates and fees for direct PLUS loans?

Interest rates on direct PLUS loans are fixed, which means the rate will stay the same throughout repayment. The current rate is 7% for loans disbursed on or after July 1, 2017, and before July 1, 2018. There is also a direct PLUS loan fee, currently 4.264% for loans disbursed on or after Oct. 1, 2017, and before Oct. 1, 2018.

Who is responsible for repaying a direct PLUS loan?

The person who takes out a student loan is on the hook to pay it back, regardless of whose education it’s paying for — that includes parents taking on loans for their child.

You may make an agreement with your child that he or she will repay the loan over time, but you’ll still be shouldering the legal obligation.

Tracie Pavon, the assistant vice president of enrollment and financial assistance at Iowa’s Simpson College, says missed payments will “never hurt the student’s credit.” The burden of missed payments will fall on the parent responsible for the loan instead.

How long is repayment on a direct PLUS loan?

As with other federal loans, the default repayment option for direct PLUS loans is the standard 10-year plan. On this plan, accrued interest and the principal loan balance must be repaid monthly for 10 years or until the debt is paid off.

Extended or graduated plans are also available to all direct PLUS loan borrowers. But, income-driven repayment plans are only available for direct PLUS loan borrowers who are graduate or professional degree students, or to parent borrowers who consolidate their PLUS loans into a direct consolidation loan; they would then be eligible for the income-contingent repayment plan.

When does repayment begin for direct PLUS loans?

Graduate or professional student borrowers don’t have to make loan payments while still enrolled at least half-time and for the six-month grace period after leaving school.

Parents who borrow direct PLUS loans are expected to make payments once the loans are fully paid out, but you may request a deferment while your child is enrolled at least half-time and for six months after leaving school.

Interest will accrue on the loan during all deferment periods for both graduate and parent borrowers.

How do direct PLUS loans differ from other federal direct loans?

Credit history matters

PLUS loans, unlike other direct student loans, don’t require a specific credit score. But parents and graduate students must show that they don’t have negative marks on their credit history, also known as adverse credit. Those who do not qualify because of adverse credit can appeal or get an endorser, similar to a cosigner, who agrees to pay your loan if you do not.

PLUS loans are still easier to get than private student loans because they don’t take a credit score into account when determining eligibility and interest rates.

Parents and graduate students taking out PLUS loans must show that they do not have negative marks on their credit history.

If a parent borrower can’t get a loan, the student might be eligible for additional unsubsidized loans. Students should contact their school’s financial aid office for more information.

Fewer IDR plans for parent borrowers

Graduate PLUS borrowers having difficulty making payments may opt for an income-driven repayment plan.

Parent PLUS borrowers do not have this option available unless they first consolidate their PLUS loans; they can then opt for the income-contingent repayment plan. This plan extends your loan term to 25 years and caps your payments at one of two options, whichever is lower: 20% of your discretionary income or the amount you would pay on a repayment plan with fixed monthly payments over a 12-year loan term.

Higher interest rates and fees

Though new interest rates are set by the federal government each year, direct PLUS loans always carry higher interest rates and fees than other direct loans:

Interest rates for 2017-18:

  • Direct PLUS loans: 7%
  • Subsidized and unsubsidized direct loans for undergraduates: 4.45%
  • Unsubsidized direct loans for graduate or professional students: 6%

Fees for 2017-18:

  • Direct PLUS loans: 4.264%
  • Subsidized and unsubsidized direct loans: 1.066%

Direct PLUS loan rates and fees are higher than other direct loans to ensure the program costs less within the federal budget, according to Jason Delisle, resident fellow working on higher education financing at the American Enterprise Institute, a public policy think tank.

While PLUS loans can be taken out by both parents and graduate students, Colleen Campbell, associate director for postsecondary education at the Center for American Progress, said the interest rates on PLUS loans were initially made higher “with the understanding that parents have, conceivably, an income, that they’re earning to repay the loan, whereas for students, their income is not guaranteed.” Campbell also said the department was able to justify making PLUS loans carry higher interest rates because they were meant to be an additional resource to pay for college and not the primary means.

Due to the higher interest rates and fees, graduate students should maximize unsubsidized loan offerings before taking on PLUS loans.

Graduate students should maximize unsubsidized loan offerings before taking on PLUS loans.

Private student loan options

In some cases, parents or graduate school borrowers may be able to get lower interest rates and fees with a private loan from a bank, credit union or online lender.

Compare interest rates, repayment plans and protections, such as deferment and forbearance, before taking on any loan.

Updated Nov. 3, 2017.

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