What You Need to Know About Parent PLUS Loans

Loans, Student Loans
Help Your Kid Graduate College Debt-Free

No parent wants to see a child take on potentially debilitating student loan debt. So if you’ve explored all other financial aid options and you still come up short, your parents may decide to take out a Direct Parent Loan for Undergraduate Students, often referred to as a PLUS Loan, to help pay for your college education.

But these loans have come under fire in recent years. Critics have condemned how easy it is for parents to get big loans with relatively high interest rates, no annual borrowing limits and fewer protections than student-specific federal loans. Before your parents take out a PLUS Loan, here’s what your family needs to know.

Parents are responsible

PLUS Loans help families pay for college costs not covered by other loans, scholarships or grants. To get a PLUS Loan, as with any other federal aid, you must fill out the Free Application for Federal Student Aid. The amount you qualify for will be included in the financial aid award letter your college sends you.

But PLUS Loans are different from other federal student loans in that the responsibility for repaying the PLUS Loan falls on your parents. That obligation cannot be transferred to the student, even after graduation. Parents are required to sign a master promissory note when agreeing to the terms of the loan, which means they are solely responsible for the loan and are not acting as co-signers.

The maximum amount parents can borrow is the total cost of college — including tuition, books and housing — minus any other financial assistance the student has been awarded. In other words, all the costs that are left over once you’ve exhausted other types of aid.

Annual amount not limited

Unlike with most other federal loans, there’s no annual limit on PLUS Loans. Because of this, parents who take out large amounts may still be paying off debt well into retirement.

While other federal loans do not require a credit check, PLUS Loans do. Parents who have poor credit may have to use an endorser, someone with better credit history, to back up the loan. Or they can submit documentation explaining their circumstances to the U.S. Department of Education.

On the other hand, while proof of income is required for a private loan, such proof isn’t necessary to receive a PLUS Loan. However, critics say this means parents can be saddled more easily with big debts they won’t be able to repay later.

Repayment begins quickly

Parents must begin making payments on PLUS loans as soon as they’re disbursed, according to Federal Student Aid. But your parent can request to defer a PLUS loan, or to postpone making payments on it, while you’re in school and for the six months after you’ve graduated. Your parent must call their loan servicer, the company that manages the loan, to ask for a deferment. Graduate and professional students are also eligible to take out PLUS loans on their own behalf. Unlike your parent’s loan, graduate PLUS loans are automatically placed in deferment while the student is enrolled at least half-time and for the six months after graduation — no request to the loan servicer required.

Keep in mind that interest will accrue while your parent isn’t making payments and will be added to the principal balance once the loan goes into repayment. That increases the total amount your parent will have to repay. The standard repayment plan is 10 years, but plans may be changed at any time and possibly extended up to 25 years. Extending the loan means parents pay less each month, but will pay more in interest overall.

Parents who default on a PLUS loan are subject to a range of consequences. The full balance of their loan will become due immediately, their credit will be damaged and they will lose eligibility for future federal student aid and assistance. Those who default may also be sued by the government, and all or part of their federal and state tax refunds could be automatically applied to their outstanding loan balance. Even their wages may be garnished.

PLUS Loans are more expensive

The fixed interest rate on PLUS Loans disbursed between July 1, 2015 and July 1, 2016 is currently 6.84%, which is higher than for other federal loans. Perkins Loans, for instance, carry a 5% interest rate, and other Direct Loans are at 4.29%.

There is also a loan origination fee on all PLUS Loans, which is determined by the timing of the loan disbursement. For loans disbursed between October 1, 2014 and October 1, 2015, it’s 4.292%. The fee on loans disbursed the following year is 4.272%. Some borrowers are eligible to refinance PLUS Loans to lower their interest rate.

If you’re looking to a PLUS Loan because you need more money for your education and don’t want to pursue private loans, make sure your family borrows only what you’ll need each year. And if you find you no longer need money you borrowed, you’ll have the chance to cancel all or part of the disbursement when each payment is released, usually twice a year.

Paying for higher education can be grueling. While PLUS loans may seem the obvious choice to help lighten your debt load, be careful your parents don’t borrow too much. Otherwise, they’ll find themselves paying the bill long after the hoopla of graduation has ended.

This article was originally published at USA Today.

Alexandra Rice is a staff writer at NerdWallet, a personal finance website. Email: alexandra@nerdwallet.com. Twitter: @Alexandra_Rice.

Image via iStock.