When deciphering your financial aid award letter, it’s important to notice how much of your financial aid is in the form of student loans, which you’ll have to pay back, rather than in the form of scholarships and grants.
Not all student loans are created equal. To help you make smarter decisions when financing college, NerdScholar asked financial aid experts to decode PLUS loans and what they really mean for a student’s financial well-being.
What is a Direct PLUS loan?
The Parent Loan for Undergraduate Students (PLUS) is a type of federal loan that parents use to help pay for their child’s college education. It typically helps families fund any college costs that aren’t covered by other financial aid options, such as scholarships, grants, and federal subsidized and unsubsidized loans.
“For parents, when there is a gap between their child’s financial aid and costs,” says Dean Obenauer, assistant director of financial aid for financial literacy at Nebraska’s Creighton University, “it may be an option to take out a loan rather than coming up with the money to pay the difference at the beginning of each term.”
To determine how much in PLUS loans your family can borrow, remember to fill out the Free Application for Federal Student Aid, or FAFSA, each year between January and June.
Families thinking about borrowing PLUS loans should also consider how this debt will affect their future finances. Obenauer encourages parents to “think beyond the first year of their child’s college education and look at the four-year picture.”
Who can take out a Direct PLUS loan?
Despite being included in a students’ financial aid award letter, PLUS loans don’t actually fall under the same category as most student loans. Rather, “PLUS loans are always the responsibility of the parent to repay,” says Joseph Trentacoste, assistant vice president of student services at Mercy College in New York. Families should be aware that PLUS loans “cannot be transferred to the student, even through consolidation after graduation.”
Tracie Pavon, the assistant vice president of enrollment and financial assistance at Iowa’s Simpson College, emphasizes that PLUS loans “will always be the legal responsibility of the parent to repay.” Pavon adds, “if the student makes arrangements with their parents to pay the PLUS loan and they do not follow through, it will never hurt the student’s credit.” Rather, the burden of missed payments will fall on the parent responsible for the loan.
But more often that not, parents take on PLUS loans assuming that their college grad will help make payments over time. Sara Beth Holman, director of financial aid at Wisconsin’s Lawrence University, does not “recommend that a parent borrow a PLUS loan with the intent that the student will pay it back. Assuming the student is also borrowing federal direct student loans, they are going to have their own loans to pay back and may not be able to take on the additional debt of repaying the parent’s loan.”
How are PLUS loans different from other federal loans?
There are significant differences between the PLUS, Stafford and Perkins loans. Be sure you weigh all of your financial aid options—including scholarships, grants, and work-study programs—before your parents consider taking out a PLUS loan.
Credit scores matter. Unlike Stafford and Perkins loans, which don’t require student borrowers to prove creditworthiness, parents taking out PLUS loans must show that they have a good credit history. But parents who do not qualify because of poor credit shouldn’t despair: According to Elizabeth Keuffel, director of financial aid at Saint Anselm College in New Hampshire, “Parents who have an unusual credit history hiccup can appeal or get an endorser to help them obtain a loan.
Credit score simulator
What happens if…
I pay off this much debt:Get your score!
Your new score:
“If a parent knows he or she has adverse credit,” Keuffel adds, “they can apply for a PLUS loan and be denied. Then, the student would be eligible for additional borrowing under the unsubsidized Stafford Loan.” Doing so would be a great option for students who prefer not to burden their parents with their college debt.
No income-based repayment plans. “Generally,” says Sarah Fevig, director of financial aid at Chestnut Hill College in Philadelphia, “a parent PLUS loan works on a 10-year repayment plan, whereas direct student loans have flexible- and income-based repayment terms.” In other words, the amount owed on a PLUS loan, including accrued interest, must be paid back each month for 10 years or until the debt is paid off.
Another option is extending the life of the loan to 25 years. Though families will pay more in interest over time, extending their repayment plan would yield much smaller monthly fees.
Higher interest rates and other fees. Interest rates are a fact of life and come attached to all types of loans. PLUS loans carry what is known as a fixed interest rate—a rate that doesn’t change once the loan is disbursed, similar to Stafford and Perkins loans. The government sets the interest rate in July, and it stays constant for the following calendar year. The interest rate on PLUS loans is higher than on Stafford loans: 7.21% compared to 4.66%. Perkins loans, on the other hand, hold a constant interest rate of 5%.
Parents should be aware of origination fees, too, says Holman, which is the upfront fee “taken off the top of the loan before it is disbursed.” The current rate is 4.288%.
Planning for repayment. Fortunately for students, the loans you personally borrow don’t need to be paid into until six months after your full-time student status ends. As Trentacoste points out, “there is no grace period [with PLUS loans] as with Stafford loans.” Repayment automatically begins 60 days after the loan is disbursed.
The good news? Parents can choose to defer payments, he says, “as long as the student remains enrolled at least half-time in a degree-seeking program.”
When should parents borrow Direct PLUS loans?
According to Holman, “PLUS loans should only be borrowed to cover the portion of a student’s educational expenses that the student and family are not able to cover through grants, scholarships, federal student loans, student employment, savings, and other family resources.”
Though Direct PLUS loans can help families cover the full cost of their child’s education, they aren’t always the best option. Ann Whitmer, 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.”
For parents still wanting to contribute, there are alternatives to federal Direct PLUS loans. Fevig says that parents with good credit scores “may be able to get a better interest rate on a [private] loan issued from a bank than on the federal PLUS loan.”