The U.S. Department of Education runs a loan program designed for parents of dependent university students to financially assist their children. The Direct PLUS loan (Parental Loan for Undergraduate Students) program is also intended for independent graduate or professional students.
Beginning in July 2010, all PLUS loan funding began to come (and still does) from the U.S. Federal Government under the Direct Loan program. Prior to this date funding was under the Federal Family Education Loan (FFEL) program and came from private lenders. (For more options on funding university, check out Student Borrowing: University Payment Plans Vs. Federal Student Loans.)
TUTORIAL: Student Loans
What Is a Direct PLUS Loan?
Parents of dependent undergraduate students (and graduate or professional students) can receive up to the total cost of their education minus any other financial aid (grants or scholarships) that they benefit from. The PLUS loan is not income dependent, but applicants will have to pass a moderate credit check. They can pass so long as they do not have an adverse credit rating, or failing that if they can prove extenuating circumstances or obtain a co-signer they will be accepted for a PLUS loan. Interest rates are fixed at 6.84% for the 2015-2016 student year, and both the student and the parents must fill out a FAFSA form to apply. Parent borrowers must also fill out a Direct PLUS Loan application and a Master Promissory Note (MPN). An MPN is a legal document that requires the parent to repay the loan. These forms are available at your school's financial aid department and in some cases online.
All funds from a PLUS loan must be applied towards education expenses, such as tuition, student fees, on campus lodging and food, books and more. Even the cost of a computer will qualify. Any remaining funds are sent to the parent (or the student if they are the borrower). Unlike other loan programs payments to repay the loan begin immediately, although a deferment on paying back the principal while the student is enrolled at least half time and during the six month (grace) period after leaving school is allowed. Interest payments must be made from day one or they will be capitalized (added to the principal to await the end of the six month grace period).
Maximum Loan Amount
Direct PLUS loans have certain eligibility requirements that must be met before approval can be granted. These are as follows:
- If the borrower is a parent, s/he must be the biological or adoptive parent (although in some cases they may be a stepparent).
- Both the student and the parent must be U.S. citizens or eligible non-citizens.
- Both the student and the parent must not be in default of other federal education loans.
- The parent borrower must not have a bad credit history. If they fail the credit check they can still receive a loan if they can prove extenuating circumstances (determined on a case by case basis). They can also receive funding if they can get someone to co-sign the loan that can pass the credit check.
- The student must be dependent and enrolled at least half-time in a school that participates in the Direct Loan program. You are considered dependent if you are less than 24 years of age, not married, have no dependents, are not a veteran or a professional or graduate student.
Disbursements and Fees
The Department of Education will send the funds directly to the school to be applied against the student's account. The school will receive the funds in two payments throughout the school year. All funds are to be used to pay for school expenses. Interest rate charges for PLUS loans are fixed at 6.84% for the 2015-2016 student year, and an additional 4.272% administration fee will be deducted each time a disbursement is made. (For some other alternatives to pay for school, see Last-Minute Strategies To Help Pay For College.)
Parent borrowers may qualify for interest rate relief if they are members of the military on active duty. The interest rate may be capped at 6% in these cases, and the parent must request this relief from the U.S. Department of Education. Additionally, interest will be paid by the federal government (for up to five years) if the borrower is on active duty during war times or receiving special pay due to hostilities.
Payments must be made within 60 days of the first disbursement, although a deferment can be requested and if granted only the interest payments must be made (although these too can be capitalized if requested). Otherwise there are three repayment plans available: standard, extended and graduated. There are slight differences between these plans with amortization schedules from 10 to 25 years.
If you are having difficulty in paying back the funds under the terms of the loan agreement you can request forbearance or a deferment. In some rare cases, your loan may be canceled or forgiven completely. Under no circumstances can your parent loan be transferred to the student. (For help paying off any student loans, check out Student Loan Deferment: Live To Pay Another Day.)