PLUS Loan

What Is a PLUS Loan?

A PLUS loan, also known as a direct PLUS loan, is a federal loan for higher education available to the parents of undergraduate students, in addition to graduate or professional students. PLUS stands for Parent Loan for Undergraduate Students. Like federal student loans, 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 a PLUS Loan Works

For their parents to be eligible for a PLUS loan, students must be enrolled at least half-time in a school that participates in the Federal Direct Loan Program.

PLUS loan money first goes to the educational institution, which applies it to 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. For example, loans disbursed on or after July 1, 2021, and before July 1, 2022, have an interest rate of 6.28%.

How to Qualify for a PLUS Loan

To apply for a PLUS loan, students and their parents must fill out the Free Application for Federal Student Aid (FAFSA). The parent must also pass a standard credit check. Students who are working toward a graduate or professional degree at an eligible school can also apply for PLUS loans on their own behalf. Such loans are often referred to as a grad PLUS loan, as opposed to a parent PLUS loan.

For a parent PLUS loan, the student must be a dependent of the parent—biological or adoptive—or, in some cases, a stepparent or grandparent. Parents and students must both meet the general eligibility requirements for student aid, such as being 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 their poor credit score. When parents can't qualify for a PLUS loan, their children may be eligible for student loans with larger limits.

Grad PLUS loans have the same eligibility requirements, except that 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 their undergraduate education, minus any other financial aid they receive. This includes tuition, room and board, fees, books, and other related expenses. In addition, the borrower does not have to demonstrate financial need to be eligible for the loan.

In addition, PLUS loans have interest rates that are fixed. The rate stays the same throughout the entire length of the loan until it's paid off in full. So there is no threat of higher interest charges, even when market rates go up. The rates on PLUS loans are relatively low, but not as low as those on student loans.

Cons

One of the potential downsides of relying on PLUS loans is that parents 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. Those with poor credit may still be able to qualify if they have someone to guarantee the loan.

Another drawback of PLUS loans is that the government charges a fee, which is deducted from each disbursement and reduces the amount of money you actually receive. The fee for loans advanced on or after Oct. 1, 2020, and before Oct. 1, 2022, is 4.228%. This means the fees for a loan of $25,000 would total $1,057. When it comes time to pay off the loan, you must repay the entire amount you borrowed, including those fees.

Finally, parents are permanently responsible for repaying the PLUS loan. They cannot transfer it to their child, even if the child has the means to repay it. Additionally, unlike a Sallie Mae loan, parents will be unable to have their loan balance forgiven if their child faces total permanent disability (TPD).

Repaying PLUS Loans

Payment on a PLUS loan must generally begin once the entire loan has been disbursed. You can either start repaying your loans while the student is still in school or request a deferment. With a deferment, you will not need to make payments while the student is enrolled at least half-time or for an additional six months after the student graduates, leaves school, or drops below half-time enrollment. Interest will continue to accrue during that time, however, and will be added to the loan's balance.

The Department of Education offers several repayment plans for parent PLUS loans, including:

• Standard repayment plan. Under this plan, you make fixed monthly payments for up to 10 years. If you consolidate more than one parent Plus loan, you can extend the repayment period to up to 30 years.
• Graduated repayment plan. In this plan, you'll also pay your loan off over a period of up to 10 years. But rather than being fixed, your payments will start off low and then increase every two years.
• Extended repayment plan. This plan, which is available to borrowers who owe more than $30,000 in direct loans, allows you to pay off your loans over 25 years, by making either fixed or graduated payments.

In the case of grad PLUS loans, borrowers may have additional options, including income-driven repayment plans that base their monthly payment on their income and family size. Generally, grad PLUS borrowers have 10 to 25 years to repay their loans, depending on the repayment plan they choose.