Considering The Risks Of A Cosigner
Although it may be difficult for a grandparent to refuse helping a family member, it is necessary to think about the consequences of cosigning a student loan.
Cosigners are legally on the hook for debt repayment, just like the primary borrower. If the primary borrower slacks during repayment, then the cosigner will be responsible for the remaining debt.
If your cosigner is a grandparent, you need to think about the implications cosgining could have on their livelihood. Senior citizens are often on a fixed or limited income, and taking over student loan payments could negatively impact their finances uncontrollably.
What Credit Score Is Needed For A Parent Plus Loan
No minimum credit score is needed to get a parent PLUS loan. Federal loans aren’t like private parent student loans, which use your credit score to determine whether you qualify and what interest rate you’ll receive.
But parent PLUS loans do have a credit check, and you won’t qualify if you have adverse credit history. That can include negative line items on your credit report like payments that are 90 days late, tax liens and more.
Check your credit for adverse information before applying for a parent PLUS loan. You are entitled to one free report a year from each credit reporting bureau Equifax, Experian and TransUnion or you can get a free credit report through NerdWallet.
When Should You Pursue The Double Consolidation Loophole
Keep in mind that this legal loophole could potentially close at any time so you might want to jump on this option sooner than later.
However, it might be worth waiting if you have more children to send to college. If you anticipate taking on more Parent PLUS Loan debt to fund your childrens education, then it makes sense to wait on the double consolidation process.
Many parents choose to wait to undergo this process until all of their children are out of college. The main goal is to consolidate your loans twice so that you access the most affordable income-driven repayment plans.
For example, if you pursued a Direct Consolidation Loan for educational loans in the past, but took out four new Parent PLUS Loans to fund another childs education, you can consolidate the four new loans into two separate consolidations. From there, you could consolidate the two consolidation loans into a new single consolidation loan without touching the original one.
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Double Consolidation For Parent Plus Loans
Parent PLUS loans arent eligible for income-driven repayment on their own. The lack of IDR plans during can put a wrench in your future financial plans. Especially, if youre planning a modest retirement in the near future.
Through a Direct Consolidation Loan, you can combine multiple Parent PLUS Loans. But a Direct Consolidation Loan only provides access to the income-contingent repayment plan which calculates monthly payments at 20% of your discretionary income.
Luckily, its possible to get this monthly payment even lower with the help of double consolidation. The double consolidation loophole offers parents the opportunity to access lower repayment options, which can be based on 10% to 15% of a parent borrowers discretionary income.
Double consolidation isnt a strategy youll see overtly offered by your loan servicer. But a double Direct Consolidation Loan process offers a pathway for Parent PLUS Loan holders to access more IDR options to ease the repayment burden of these loans.
Determine If Youre Eligible For The Parent Plus Loan
Before you can qualify for a parent PLUS loan, you must meet three requirements:
- You must be a parent biological or adoptive of a dependent child who is enrolled at least half time as an undergraduate in a participating school. Under certain circumstances, a stepparent can apply for this loan.
- You cannot have an adverse credit history. While theres no minimum credit score requirement, loan defaults, bankruptcies, tax liens and certain other negative marks on your credit report could disqualify you. However, you may still be eligible for a parent PLUS loan if you can add on a co-signer without adverse credit history or if you can prove that extenuating circumstances led to your credit problems.
- Both the borrower and the student must meet the general federal student financial aid requirements. The borrower must be a U.S. citizen or an eligible noncitizen and have a Social Security number, and the student must be enrolled in an eligible program and school.
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How Parent Plus Loans Work
College is expensive and costs continue to rise. In 1989, the average cost of a 4-year degree school term was $1,730. As of 2020, the average cost increased to an average of $10,440 per school term.
With college costs continuing to skyrocket, many parents apply for federal Parent PLUS loans. Since these loans are issued in the parents name, it is important that parents understand the details of what these loans entail and how often you have to apply to ensure students receive proper funding.
So, to avoid missing an application deadline, heres some helpful information about Parent PLUS loans and their application process.
Pros And Cons Of Parent Plus Loans
From a students perspective, a Parent PLUS Loan can be a great way to help get their education funded without taking on more debt.
From a schools perspective, this helps students pay for their education costs, so its a win for them. From a fill-the-gap perspective, these loans allow you to apply for whatever amount is needed to pay the school-certified cost of attendance not already covered by other means.
These loans are pretty straightforward to get, because debt-to-income ratios are not a factor, and a parents ability to get one is not limited by income. Credit history is factored in, and an adverse credit history can affect approval .
Adverse credit history in this case can include foreclosures, bankruptcy discharges, repossessions, defaults, wage garnishments, current delinquencies, and more. If you believe your credit circumstances qualify as adverse, you may still be able to be approved for funds, especially if you get an endorser who doesnt have these credit challenges.
Parent PLUS loans also may be eligible for loan forgiveness programs , income-driven repayment plans and other repayment benefits associated with federal student loan programs, including deferment and forbearance options.
Challenges with Parent PLUS loans include the fact that, because there isnt a limit on the amount that can be borrowed as long as it doesnt exceed college attendance costs, it can be easy to take on significant amounts of debt .
Now, back to the idea of transferring the loan.
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Select Which School To Notify
You must designate a school to notify when you complete the application. The school is the entity that applies the funds to the students account.
In this same section, select the reason for the application.
Youll fill out the same application whether youre a new borrower or just changing the amount you initially asked for. Any requests for changing the amount must be completed before the loan is disbursed.
Options If Your Parent Plus Loan Is Denied
Not everyone will qualify for a parent PLUS loan, but if youre denied you can try these alternatives:
- Get an endorser for your Parent PLUS Loan. This is equivalent to a co-signer: someone with non-adverse credit who agrees to repay the loan if you dont.
- Document extenuating circumstances. Some examples of extenuating circumstances: adverse information thats incorrect, older than reported, or for accounts that are part of a bankruptcy settlement or otherwise resolved. Start the credit appeal process to provide proof of your extenuating circumstances. Youll also need to complete PLUS credit counseling.
If these steps dont work, and your parent PLUS loan is denied, even that can have an upside. Students whose parents cant get PLUS loans can gain access to more federal student loans.
A dependent first-year student can only borrow up to $5,500 in federal student loans per school year, for example. But that limit goes up to $9,500 if the students parents were denied PLUS Loans.
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Direct Parent Plus Loans
If you are a dependent undergraduate student, your biological or adoptive parent may apply for a Direct Parent PLUS Loan. Grandparents and legal guardians are not eligible to apply for a Parent PLUS Loan on your behalf. The maximum amount a parent can borrow is up to your estimated cost of attendance minus other financial aid received for the academic year. Learn more about the Direct Parent PLUS Loan program.
Federal Parent Plus Loan
If you are a dependent undergraduate student, a PLUS loan enables your parents or stepparents to borrow money that can be applied to your educational expenses. Parent PLUS Loans are loand directly from the federal goverment to the borrower. This loan is not based on your family’s income or asset information on the FAFSA, but does require a credit check.
Steps to applying for the Parent PLUS Loan:
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Who Can Borrow From The Parent Plus Loan Program
|Biological or Adoptive Parent|
|Yes, but only for as long as the stepparent is married to the students parent|
|Grandparents, Aunts, Uncles, Other Relatives||No, unless they have legally adopted the student|
|Legal Guardians or Foster Parents||No|
Eligibility for the Parent PLUS Loan does not depend on demonstrated financial need.
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What To Do If You Are Denied For A Parent Plus Student Loan
If you are denied a parent PLUS loan due to adverse credit history, you may be eligible for reconsideration if you do one of the following:
- Get a cosigner with good credit who agrees to repay the loan if you’re unable to do so.
- Document the extenuating circumstance that led to the adverse credit history to be considered for a loan.
PLUS loan credit counseling is also mandatory if you have adverse credit history and decide to get a cosigner or document extenuating circumstances to get approved for a loan.
If you are denied for a parent PLUS loan even after requesting reconsideration, you may need to consider other options. These include applying for a private student loan, or using your home equity through a cash-out refinance or home equity line of credit. Using your home as collateral can be risky, however, so weigh the pros and cons before taking this step. Having your child attend a lower-cost school or junior college at least temporarily is another way to reduce costs while you work on improving your credit and setting aside additional funds for college.
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Parent Plus Loan Limits
You can borrow up to your childs full cost of attendance each school year, minus all other student aid. Your childs school sets the cost of attendance, which is a sum of all education-related expenses.
Student aid such as scholarships, grants, or your childs student loans are applied to this total cost. The difference between student aid granted and remaining costs is how much you can borrow with parent PLUS loans.
Understanding Parent Plus Loans
Congress established the Parent PLUS Loan program in 1980 with caps on how much parents could borrow. Those limits were eliminated in 1992, and parents can now take out up to the full cost of attendance at their childs institution , after any other financial aid the student receives.
Parent PLUS Loans typically come with higher interest rates than Direct Loans. For Parent PLUS loans issued in the loan year starting July 1, 2019, the interest rate was 7.08% , while the interest rate for Direct Subsidized and Unsubsidized Loans to students was 4.53% .
Interest rates for federal student loans are fixed, meaning they stay the same over the entire term of the loan. You generally cant transfer a Parent PLUS Loan to your child down the line, but your child may be able to apply for student loan refinancing later on and, if they qualify and it makes sense to do so, use it to pay off the loan.
To apply for a Parent PLUS Loan, you typically need to fill out an online application at StudentLoans.gov . However, some schools have a different process and require you to request a loan through the institutions financial aid office.
StudentLoans.gov has a list of all schools that allow you to apply through the website. As for any federal aid, you can only apply once your child has filled out the Free Application for Federal Student Aid . When the loan is disbursed, youll have to pay a loan fee, which was 4.236% of the loan amount disbursed between October 1, 2019, and October 2, 2020.
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Where Do Parent Loans Fit Into The Financial Aid Picture
Its important to explore all of your options, talk to loan providers and consult with university financial aid officers to make smart financial choices for you and your family.
Parent loans are only one of the tools that can be used to pay for college. Before considering any type of loan, parents should encourage their child to find aid that does not need to be repaid such as grants and scholarships. Then they can consider using any savings or income to cover the costs. If theres still a gap in funding, a parent loan might make sense if you can afford and are comfortable taking full responsibility of repaying the loan.
Learn more about how use loans to pay for college.
Grandparents And Federal Loans
If youve already asked your parents for help paying for school, youre probably familiar with the Parent PLUS loan program. This is the program that lets parents apply for additional federal loans on top of what the student has already received. These parent loans are in your parents name and they are responsible for repayment.
Grandparents cannot apply for the Parent PLUS loan program. The only way that a grandparent could do so for their grandchild is if they have formally adopted their grandchild.
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Still Unsure If Parent Plus Loans Are Right For You
Dont forget that you can always help your student find alternative ways to pay for school. There are numerous outside scholarships and grant opportunities that can supplement their financial aid package.
If you decide to take out any kind of loan for your child, have a financial plan. Dont let it destroy your own finances or your future retirement.
If youre still unsure of which way to help your child in college, reach out to the team at Student Loan Planner®. We can offer you and your student a pre-debt consultation to look at all of your choices.
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Take our 11 question quiz to get a personalized recommendation of whether you should pursue PSLF, IDR forgiveness, or refinancing .
Filed Under: Parent PLUS Loans
About Bethany McCamish
Bethany McCamish works as a freelance writer and graphic designer in the personal finance and lifestyle content space. She is also the owner of His and Her FI, a personal finance blog and podcast, which has brought her coverage from CNBC, Milk and Honey, and a Plutus Award nomination. She believes that transparency and conversations about money are essential in gaining control of finances. When she is not working, she can be found hiking with her massive dog or traveling the world and taking photographs.
What Makes You Eligible For Parent Plus Loans
Eligible parents can apply for Parent PLUS Loans with any schools that participate in the Direct Loan program. To be eligible for a Parent PLUS Loan, you must be the parent of a dependent undergraduate student. The student must be enrolled in an eligible school at least half time.
Parents can be biological, adoptive or, in some cases, a step-parent. Grandparents could be eligible for Parent PLUS Loans if theyve legally adopted the dependent student. Otherwise, grandparents and legal guardians arent eligible for these loans.
Your credit history is another eligibility factor. If you have an adverse credit history, its more challenging to get a Parent PLUS Loan. Youd need to get an endorser or prove extenuating circumstances to the U.S. Department of Education.
Lastly, both you and the dependent student must meet the general eligibility requirements for federal student aid.
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Transferring Parent Plus Loans To Your Child
If you want to be rid of Parent PLUS Loans, you can have them put in your childs name. You can transfer a Parent PLUS Loan by having your child refinance it. Of course, you want to make sure your child is financially able to take on the student loan payments. Theyll also need to have a good credit history.
Student Loan Planner® has two lenders we partner with that allow Parent PLUS Loans to be refinanced in your childs name: CommonBond and Laurel Road.
Tips For Parent Borrowers And Parent Plus Faq’s
- The Federal PLUS Loan proceeds are applied to the students University bill at the beginning of the semester. Any remaining loan balance will be credited to the student in the form of a refund unless the parent indicates that any refund should be mailed via a paper check to the parents address provided on the PLUS application.
- If a parent is denied the Parent PLUS loan and does not wish to appeal the decision, the student can borrow additional unsubsidized loan funding by simply completing the Student section on the bottom of the PLUS application.
- The Parent PLUS Loan Application includes a section known as the Authorization to Pay section. If you answer yes to this question, you are allowing the loan to pay for the students charges at UNM. If you answer no to this question, you must make payment arrangements to pay the students account balance in full before we can release the credit balance. Youll need to notify our office when the account balance is zero.
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