Student Finacial Aid
Parents of dependent students can take out loans to supplement their children’s aid packages. The federal Parent Loan for Undergraduate Students (PLUS) lets parents borrow money to cover any costs not already covered by the student’s financial aid package, up to the full cost of attendance. There is no cumulative limit. Like the Stafford Loan, PLUS loans are either FFELP (provided by private lenders, such as banks) or Direct (funds provided by the government).
Starting on July 1, 2006, graduate and professional students will also be able to borrow money through the PLUS Loan program to pay for their own education. These days the PLUS loan is referred to as either the Parent PLUS or Grad PLUS loan.
PLUS Loans have a fixed interest rate of 8.5% for loans with a first disbursement after July 1, 2006. Previously, PLUS loans had variable interest rates (based on 52 week T-bill rate + 3.10%) capped at 9%. The interest is not subsidized while the student is in school, unlike the subsidized Stafford and Perkins loans. The PLUS loan charges loan fees of 4%, deducted from each disbursement check. All lenders offer the same rate for the Stafford Loan, although some give discounts for on time and electronic payment.
Repayment begins 60 days after the funds are fully disbursed, and the repayment term is up to 10 years. There is no grace period as there is with the Stafford Loan program. Some lenders allow parents to defer payment on the PLUS Loan while the student is enrolled in school by capitalizing the interest. Interest is capitalized no more frequently than quarterly. Payments can also be deferred if the parents are themselves enrolled in college. They will need to submit an application for an in-school deferment.
PLUS loans can be consolidated just like Stafford and Perkins Loans, although a parent’s PLUS loan cannot be consolidated with the student’s Stafford and Perkins Loans, since the borrowers are different. But parents who have their own Stafford loans can consolidate them together with any PLUS loans they have borrowed to pay for their children’s education.
Consolidating PLUS loans provide access to alternate repayment terms, such as extended repayment, graduated repayment, and income contingent repayment.
Note that since the consolidation loan has an interest rate that is capped at 8.25%, consolidating your PLUS loans can reduce the interest rate by 0.25%. It is best to consolidate PLUS loans separately from Stafford and Perkins Loans to maximize the benefit of this interest rate reduction. However, one should also consider the impact of consolidation on available education loan discounts.
PLUS loans are the financial responsibility of the parents, not the student. If the student agrees to make payments on the PLUS loan, but fails to make the payments on time, the parents will be held responsible.
Parents who are considering a PLUS loan also often consider a home equity loan or an alternative loan. There are several tradeoffs between these options.
To apply for a PLUS loan, one does not need to submit the Free Application for student financial aid. Instead, one of the parents submits a loan application and signs a master promissory note.
Eligibility for the PLUS loan depends on a modest credit check that determines whether the parent has an adverse credit history. An adverse credit history is defined as being more than 90 days late on any debt or having any Title IV debt (including a debt due to grant overpayment) within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off.
If a student’s parents are denied a PLUS loan, or the college student financial aid administrator determines that the parents are likely to be denied a PLUS loan, the student becomes eligible for increased Stafford Loan limits. Only one parent needs to apply for and be denied a PLUS loan. However, if one parent is denied a PLUS loan and the other is approved for a PLUS loan, the student is not eligible for increased Stafford Loan limits.
Lenders may allow parents to defer payments on the PLUS loan while the student is in school by granting one of several types of forbearances. In each case, the forbearance allows a full or partial suspension of payments for up to a year at a time. Interest continues to accrue during the forbearance even if payments of interest are suspended, but is usually capitalized only at the end of the forbearance. The discretionary forbearance can be renewed each year; the economic hardship deferment and excess debt burden forbearances each have a three-year time limit.