What Is a PLUS Loan?

A PLUS loan, also known as a Direct PLUS loan, refers to a federal loan for higher education expenses available to parents of dependent undergraduate students, and to graduate or professional students. Parents borrow money for students for PLUS loans, which is why PLUS stands for Parent Loan for Undergraduate Students.

PLUS loans are offered through the U.S. Department of Education's William D. Ford Federal Direct Loan Program. The government itself is the lender, hence the name direct loans.

How PLUS Loans Work

Students who benefit from a PLUS loan must be enrolled in a school that participates in the Federal Direct Student Loan Program and must have filled out the Free Application for Federal Student Aid (FAFSA) form used to apply for all government loans.

PLUS loan money first goes to the educational institution, which applies it to major expenses including tuition, room and board, fees, etc. Any remaining funds are disbursed directly to the parent or to the student.

PLUS loans carry a fixed interest rate for their entire term. Loans disbursed on or after July 1, 2019, and Before July 1, 2020, carry an interest rate of 7.08%. Loans advanced on or after July 1, 2018, and before July 1, 2019, come with an interest rate of 7.6%. There is also a direct loan fee—a percentage of the total amount of the loan—which is deducted from each loan disbursement.

A Direct PLUS Loan is commonly referred to as a parent PLUS loan when made to a parent, and as a grad PLUS loan when made to a graduate or professional student.

How People Qualify for PLUS Loans

To be eligible for a PLUS Loan, a student must be enrolled in a qualifying educational institution at least half-time. The parent must also pass a standard credit check. Despite the name, students working toward a graduate or professional degree who are enrolled at least half-time at an eligible school can also apply for PLUS loans on their own behalf.

For a parent PLUS loan, the student must be a dependent of the parent—biological, adoptive, or, in some cases, a stepparent or grandparent. Both parents and students must meet the general eligibility requirements for student aid—a U.S. citizen or permanent resident alien—and the parent must not have an adverse credit history. If they do, they may still qualify if they can obtain an endorser for the loan, or indicate extenuating circumstances for the poor credit score.

Grad PLUS loans have the same eligibility requirements, only they apply just to the student.

Pros and Cons of PLUS Loans

Pros

There are several major benefits to taking out a PLUS loan. First, the parent can borrow the entire amount the student needs for his or her education. This includes housing, tuition, books, and other related expenses. The maximum amount available is "the cost of attendance (determined by the school) less any other financial assistance received," according to the Federal Student Aid website. In addition, the borrower does not have to demonstrate a financial need to be eligible for the loan.

Perhaps one of the major benefits is that they come with interest rates that are fixed. This means the rate stays the same throughout the entire length of the loan until it's paid off in full. There is no threat of higher interest charges, even when market rates go up.

Pros

  • Parents can borrow the entire amount needed for the student's education.

  • Borrowers don't need to have a financial need to be eligible for a PLUS loan.

  • PLUS loans come with fixed interest rates.

Cons

  • A credit check is required for PLUS loans.

  • An origination fee is charged and deducted from the proceeds of the loan.

  • PLUS loans must be repaid once the funds are received.

Cons

One of the pitfalls of relying on a PLUS loan is that you are subject to a credit check. Although you won't necessarily need excellent credit to be approved, your credit file should be fairly clean if you want to qualify. For those who have poor credit, they may still be able to qualify provided they have someone to guarantee the loan.

Another disadvantage of carrying a PLUS loan is the origination fee. This fee is charged by the lender and covers the cost of advancing the loan. This fee is deducted from the total amount of the loan. The origination fee for loans advanced on or after Oct. 1, 2019, and before Oct. 1, 2020, is 4.236%. This means the fee for a loan of $25,000 is $1,059. Any loan disbursed on or after Oct. 1, 2018, and before Oct. 1, 2019, is charged an origination fee of 4.248%.

In addition, the loans must be repaid once the funds are received. This is unlike other loans, which have a grace period—a period of time the borrower doesn't have to make payments after the student graduates or drops below full-time enrollment.

Repaying PLUS Loans

Borrowers can start repaying their PLUS loans right away. They can request a deferment while the student is in school, and for an extra six months after he or she graduates, leaves school, or attends less than half-time.

The Department of Education offers several repayment plans, including:

  • Standard Repayment Plan: Fixed payments for a decade or up to 30 years for consolidated loans.
  • Graduated Repayment Plan: Payments increase every two years for a decade or up to 30 years for consolidated loans.
  • Extended Repayment Plan: The choice of fixed or graduated payments for a quarter-century.

In addition, there are several income-based repayment plans that are for graduate or professional PLUS loans only. Generally, borrowers have 10 to 25 years to repay their loans, depending on the repayment plan they choose.