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Two Versions Of The Federal Plus Loan

What is a Federal Direct PLUS Loan?

There are two versions of the Federal PLUS Loan: the Federal Parent PLUS Loan and the Federal Grad PLUS Loan.

Other than the differences in the borrower, the purpose of the loan and some discharge provisions, the Parent PLUS and Grad PLUS loans are nearly identical. The Federal Grad PLUS Loan first became available on July 1, 2006, through an amendment to the Federal Parent PLUS Loan.

How Do Federal Parent Plus Loans Work

Interest begins accruing on federal parent PLUS loans as soon as the loan is disbursed, although you can defer payments while your child attends school. Unlike private options, parent PLUS loans are eligible for some federal repayment plans and forgiveness programs.

To apply for a parent PLUS loan, follow these steps:

  • Check your eligibility. To qualify, youll generally need to be the parent of a dependent undergraduate student who is enrolled at least half time in an eligible school. Stepparents qualify in some cases, but grandparents and legal guardians do not. Youll also need to meet eligibility requirements for federal student aid and have a strong credit history.
  • Fill out the FAFSA. Before you apply for the loan, your child should first fill out and submit the Free Application for Federal Student Aid .
  • Apply for the loan. Head to the Direct PLUS Loan Application for Parents to apply. If you qualify, the loan will be included in your childs financial aid package.
  • Receive the funds. The Department of Education will send the funds directly to your childs school, which applies the money toward tuition, fees, room, board and other school charges. Any funds left over will go to you .
  • Consider your repayment options. Parent PLUS borrowers are eligible for four types of repayment plans: a standard repayment plan, a graduated repayment plan, an extended repayment plan and an income-contingent repayment plan .
  • How Often Does The Loan Capitalize Interest

    What is interest capitalization?

    It is very important to understand how interest capitalizes, when it capitalizes and how it affects your student loans.

    Interest capitalization is when the interest accrued on a loan is added to the principal amount of the loan, resulting in a new, higher principal.

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    Grad Plus Loans Vs Private Student Loans

    The alternative to obtaining a Grad PLUS Loan is to look at the loan options available through the private market. In recent years, the private student loan market has grown tremendously, and there are many great options with unique features. In fact, for some borrowers, private graduate school loans can be the smarter way to go.

    Now there are some similarities between the two types of loans. For starters, with Grad PLUS Loans and most private options, you can borrow as much as you need, up to your school’s total cost of attendance. And it’s standard practice to allow borrowers to defer repayment while in school and provide a six-month grace period after graduating or leaving school.

    Having said that, there are some key differences to consider:

    • The loan fee associated with Grad PLUS Loans is a big factor to think about and makes PLUS Loans a relatively expensive form of borrowing. An origination charge equal to 4.248% of the amount borrowed is on the high end when it comes to any type of lending. There are many private student lenders who don’t charge origination fees at all, and of those who do, most don’t charge anywhere near as much as Grad PLUS Loans do.
    • The interest rate is another issue. To be clear, I wouldn’t call the 7.6% fixed interest rate charged on Grad PLUS Loans high. However, several of the top private lenders offer both fixed and adjustable interest rates that are significantly lower, especially for borrowers with strong credit.

    What Are Direct Plus Loans

    Direct PLUS Loans Help Parents and Grad Students

    If a parent of a dependent student is taking out a Direct PLUS loan, its also called parent PLUS loans. For undergraduate, graduate and professional students its called a grad PLUS loan. The U.S Department of Education is your loaner and you are required to make payments as soon as the money is disbursed.

    Parents: A Direct PLUS Loan is a solid option to help you fund your childs education.

    Federal Student Aid

    All students have to apply for the Free Application for Federal Student Aid first, then complete a different form to apply for direct PLUS loans. But before you apply, here are some main details you need to know before taking out this loan:

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    Federal Direct Plus Loans

    If your credit is less than perfect, but you dont have any major negative items on your credit report, and you dont want to be limited in how much you can borrow, Grad PLUS and Parent PLUS Loans can be appealing.

    Pros

    • You can get approved as long as you dont have an adverse credit history
    • You can borrow as much as you need based on the cost of attendance and other financial aid
    • Youll gain access to certain federal benefits as a parent, and all benefits as a student

    Cons

    • Youll have a hard time getting approved if youve made some major credit mistakes
    • Interest rates are the highest among federal student loans
    • Youll pay a high upfront loan fee on each disbursement

    Eligibility Loan Terms And Requirements

    Students must submit a Free Application for Federal Student Aid when applying for a Grad PLUS Loan. Borrowers must have an acceptable credit history or a loan endorser with an acceptable credit history. Families with adverse credit may sometimes borrow under PLUS if they can document extenuating circumstances.

    Key information about PLUS

    • Because credit reports are only valid for a limited time and we process PLUS Loan applications in July, we wait until early April to accept PLUS applications so that only one credit check is required.
    • We will assume that your application is for the fall/winter terms. If you want the loan for one term only, advise us as soon as possible. We begin sending PLUS applications to the federal processor in early July. Eligibility is determined when your application is processed in July.
    • Contact our office if you require a paper PLUS Loan application .

    Eligibility Criteria

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    What If I Have Poor Credit Performance

    As mentioned before, one of the requirements for a Grad PLUS loan is good credit performance. However, having a poor credit history can still make you eligible if other factors exist.

    First, you can get an endorser or cosigner. An endorser is a third party, such as a friend, who can guarantee the payment in case you do not repay the debt. In other words, this person will be required to repay the debt if you cannot. Besides, the cosigner should have a good credit score.

    Another way is documenting an extenuating circumstance explaining your bad credit history. Extenuating circumstances indicate that the information on poor credit performance is either incorrect or outdated. For example, if you divorced and the bad debt no longer belongs to you, you can utilize this option. Regardless of which method you choose, you will need to complete a credit counseling session.

    What Are The Repayment Options

    Federal Direct PLUS Loans for Parents

    Like all Direct loans, you do not have to make any payments on your Grad PLUS loan while you’re still enrolled in school. You will also have a 6-month grace period following graduation where you wont have to make payments.

    After graduation, you will be placed on a 10-year repayment plan. However, you can repay your loan sooner without penalty. Other options include refinancing your loans or joining an Income-Driven Repayment plan. With IDR plans, your loans will be paid off or cancelled after 10 to 25 years, depending on a variety of factors.

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    Parent Plus Loan Interest Rate

    The interest rates on Parent PLUS Loans are fixed and do not change over the life of the loan. The interest rate for the 2020-2021 academic year is 5.30%.

    Every year on July 1, interest rates are reset based on current market rates.

    The interest on a Parent PLUS Loan starts to add up from the date the loan is first disbursed. If the borrower does not pay the interest as it accrues, it will be capitalized , increasing the size of the loan.

    Pros And Cons Of Plus Loans For Parents

    These days, the hardest part about getting through college often isnt the workload its figuring out how to pay for it. With the total student loan debt surpassing $1.2 trillion, many of todays grads are leaving school with a heavy financial burden. In some cases, parents are sharing some of the load by taking out PLUS loans to help cover the cost of their childs education. While there are some advantages associated with these types of loans, borrowing on your students behalf can end up backfiring. If youre a parent whos considering a PLUS loan, you need to weigh the pros and cons carefully before signing on the dotted line.

    What Will It Cost To Go To School?

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    Federal Student Loan Repayment Plans

    Every loan comes with terms for how and when you will be required to repay it. The repayment term usually refers to the amount of time you are given to repay your loan. Paying the loan back sooner will result in a lower overall cost but will result in larger monthly payments. Repayment terms can also refer to different options for repayment.

    In the case of federal student loans, the Department of Education sets out all terms for repayment. If circumstances make monthly payments difficult to meet, the DOE has programs that can lower or erase your monthly payments, and/or extend your repayment duration.

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    What Is a DIRECT Plus Loan?

    I dont think these loans should be presented with the financial aid offer at all, said Amy Laitinen, director for higher education at New America. I think it speaks more to the schools desire to bring in the students than to whats best for the family. To present it as if its really a way for paying for college when theres no way for those parents to pay it back is shameful and harmful.

    In 2011, the Obama administration set restrictions on who could borrow through the Plus program, imposing credit and income requirements. But an outcry from colleges caused the administration to reverse course the following year, making it even easier for parents to borrow.

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    Critics compare the governments loans to those given out by banks to people who couldnt afford to repay in the lead-up to the 2008 financial crisis. Unlike student loans, parent loans offer no easy option for an income-based repayment plan. If a parent defaults, the federal government can garnish wages and Social Security checks to force repayment.

    Rep. Marcia Fudge, D-Ohio, introduced a bill last year that would cap Parent Plus interest rates, allow for income-based repayment plans and mandate counseling for all borrowers, but it has been stuck in committee. Biden has not announced any plans regarding the program.

    Sign up for The Hechinger Reports higher education newsletter.

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    What Is A Parent Plus Loan

    The Parent PLUS Loan program is a federal program offered through the U.S. Department of Education. You can apply for a loan through the program if youre the biological or adoptive parent of a dependent undergraduate student whos enrolled at an eligible school at least half-time.

    Here are the essential details about a Parent PLUS Loan:

    • Maximum loan amount: The cost of attendance at your childs college minus any other financial aid they receive.
    • Interest rate: 7.08% .
    • Loan fee: 4.236% of the loan amount is deducted from your disbursement.
    • Repayment terms: The standard repayment plan is 10 years, but youll have options to extend that if you cant afford the monthly payments. Payments start immediately, but if you request a deferment, you dont need to start making payments as long as your child is enrolled at least half-time. Once they graduate, leave school, or drop below half-time enrollment, youll get a six-month grace period.
    • Your loan terms wont be contingent on your creditworthiness, but you wont be able to get approved on your own if you have an adverse credit history. That includes having a bankruptcy discharge, repossession, or foreclosure in the last five years, unpaid collection accounts, and more.

    Con #: No Limits On Borrowing

    Unlike other types of student loans, theres no limit as to how much a parent can borrow through a PLUS loan, as long as it doesnt exceed the cost of your childs education. While this may seem like an advantage, it can actually work against you if you end up taking on more debt than you can reasonably handle. You have to consider whether those large monthly payments will still be affordable if your situation were to change unexpectedly. Its also worth thinking about how the long-term cost impacts other financial priorities, such as saving for retirement.

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    Types Of Federal Student Loans

    • Direct Subsidized Loans are available to undergraduate students with financial need and recipients are not responsible for paying the interest charges on the loan while in school.
    • Direct Unsubsidized Loans are available to undergraduate and graduate students who meet the eligibility requirements, but there is no requirement to demonstrate financial need.
    • Perkins Loans are available to undergraduate and graduate students with exceptional financial need.
    • Direct PLUS Loans are available to eligible graduate students and parents.

    Direct Subsidized and Direct Unsubsidized Loans are the most common type of federal student loans for undergrad and graduate students. Direct PLUS Loans have higher interest rates and disbursement fees than Stafford Loans.

    Your Interest Rate Will Stay Fixed Over The Life Of The Loan

    Understanding Direct PLUS Student Loans

    Like other federal student loans, the Parent PLUS Loan interest rate if fixed, remaining the same throughout the life of the loan. Even if national interest rates rise, youll be locked in with the rate you got when you first took out the loan.

    What is a Parent PLUS Loans interest rate? As of July 1, 2020, Parent PLUS Loans come with a 5.30% interest rate.

    Lets say you took out a total of $30,000 in Parent PLUS Loans with a 5.30% rate. If you paid it off on a 10-year standard repayment plan, youd pay a total of $8,714 in interest.

    If you have strong credit, it might be worth shopping around with private lenders before choosing a Parent PLUS Loan. SoFi, for instance, offers APRs as low as 2.49% on parent student loans.

    If you could qualify for a rate lower than the Parent PLUS Loan interest rate of 5.30%, you could save money over the long run. If not, then a PLUS Loan might be the way to go. By shopping around with multiple lenders, you can find the loan with the lowest possible interest rate.

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    Terms Of A Direct Plus Loan

    Max Loan Amount – The students’ cost of attendance minus other financial aid. For example, if your cost of attendance is $8,000, and you receive $6,000 in other financial aid, you can borrow up to $2,000 in PLUS Loans.

    Interest Rate – The interest rate is variable , but it will not exceed nine percent. You’ll be notified every-time it changes.

    Max Loan Length – Up to 30 years, based on the amount borrowed and the repayment plan chosen. There are a number of repayment plans offered through the FFEL programs and Direct programs.

    The frequency of Payments – Monthly or quarterly. Usually, the first payment is supposed to be paid within 60 days after the loan is fully disbursed. You must begin repaying both principal and interest during the period the student is in school.

    Fees – You will pay a fee of up to four percent of the loan, deducted in the proportion each time a loan disbursement is made. Because of this deduction, you shall receive a slightly lesser amount than what you’re borrowing.

    Con #: No Grace Period

    Typically, when you take out a student loan you have six months from the time you graduate to begin repaying the loan. With a PLUS loan, parents are expected to start making payments within 60 days of the loan being disbursed. You can, however, request a deferment period if your student is still enrolled at least half-time or for a period of six months following their graduation.

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    How A Grad Plus Loan Works

    If you apply for financial aid through the federal government, your school may include loans as part of the financial aid offer. Under the William D. Ford Direct Loan program, you may receive four types of Direct Loans, one of which is a Direct PLUS Loan. These loans are available to graduate and professional students as well as parents of dependent undergraduate students. But when they’re made to graduate or professional students, they’re called grad PLUS loans.

    With a grad PLUS loan, its possible to borrow up to the cost of attendance at your institution, minus the amount of other financial assistance you receive. And like other federal student loan programs, this type of loan has a fixed interest rate throughout the loan term that is indexed tolong-termU.S. Treasury security rates. For loans disbursed from July 2020 to July 2021, that rate is 5.30%.

    If you’re eligible to receive a grad PLUS loan, you’ll receive and repay it as follows:

    You can cancel some or all of the loan proceeds you don’t need within 120 days without incurring any interest charges.

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