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Parent PLUS Loans Pros and Cons
Parent PLUS loans are one of many ways to fund a student’s education. Unlike other loans, Parent PLUS loans are taken out directly by the parent of the student. These loans can help the student keep their debt low, but there are pros and cons. Continue reading to learn more about Parent PLUS loans and the pros and cons of them!
What is a Parent PLUS loan?
Parent PLUS loans are federal student loans that are issued to parents of students. They are also paid back by the parents. These loans can be used to fill gaps in funding after exhausting other options such as scholarships and grants.
Parents can apply for Parent PLUS loans through the Department of Education.
Parent PLUS loan eligibility
There are eligibility standards regarding the relationship to the student and the parent’s credit.
Relationship to student
The parent taking out the PLUS loan must be the biological or adoptive parent of the student. Grandparents or legal guardians cannot take out a Parent PLUS loan on behalf of a student unless they legally adopt them. The parent and student must also be a U.S. citizen or eligible non-citizen.
Eligibility for Parent PLUS loans is decided by the parent’s credit rather than financial need. The first thing you must do to apply is fill out the FAFSA. This will be used to determine the parent’s eligibility.
The parent can’t have had one or more debts that were over 90 days due at any time in the 2 years before applying. The parent also can’t have a debt in collections at any time in the 2 years before applying. The parent’s credit report also can’t have a default, discharge of debt due to bankruptcy, foreclosure, repossession, or wage garnishment in the 5 years before applying.
If the parent doesn’t have great credit, they have the option to submit a letter to explain any extenuating circumstances. The parent could also get someone else with good credit to endorse them.
Pros of Parent PLUS loans
One positive aspect of Parent PLUS loans is that there is no limit on the amount that can be borrowed. The parent can choose to borrow as much as the school’s entire cost of attendance minus any other financial aid. The parent can choose to borrow the maximum amount or take only a portion of what is offered.
Another pro of Parent PLUS loans is that they have the option to apply for deferment while the student is in school. This will allow the borrower to legally put off payments until after the student graduates or leaves school. Additionally, Parent PLUS loans have the option to apply for a 6-month grace period after the student graduates or leaves school. These deferment options can help the borrower get their finances in order before having to pay the loans off.
Usually, refunds for the Parent PLUS loans are sent to the borrower. However, the parent can request that the refunds be sent directly to the student. The refunds can be used to cover other educational expenses.
See also: What to do With a Student Loan Refund
Parent PLUS loans can be paid back through 4 repayment plans. Borrowers can choose between:
- The standard 10-year repayment plan, which has fixed monthly payments over the course of 10 years
- The graduated repayment plan, which allows monthly payments to start small and gradually increase over the course of 10 years
- The extended repayment plan, which allows borrowers to select fixed or graduated payments over the course of 25 years
- The income-contingent repayment plan, which allows borrowers to make monthly payments that are based on a portion of their income. This is the only income-based option for Parent PLUS loans
Cons of Parent PLUS loans
The first downside of Parent PLUS loans is that they have a much higher interest rate than other student loans. For parent PLUS loans disbursed during 2021, the interest rate is 5.30%. The interest rates also change every year. For example, in 2019, the interest rate of Parent PLUS loans was 7.06%. These higher interest rates can make borrowers end up paying much more over time.
Parent PLUS loans also come with an origination fee. This is an extra cost that comes with the initial borrowing of the loan. In 2020-2021, the origination fee is 4.28% of the loan. Additionally, this fee is deducted from the loan before it is disbursed.
Another con of Parent PLUS loans is that they have to be repaid as soon as the final disbursement is made for the academic year. As previously mentioned, you can apply for deferment of the payments while the student is in school.
The credit check for Parent PLUS loans is also a downside. The borrower’s credit history can be a barrier to taking out a loan.
Lastly, the large borrowing potential is a con of Parent PLUS loans. Since the borrower can take out up to the school’s cost of attendance, they may end up with more debt than expected. This in combination with the high interest rates can result in more issues when repayment starts.
Over all, it’s up to you if you choose to take out a Parent PLUS loan. It can be used to help fund your student’s education while keeping them out of debt, but at a higher cost. Hopefully this list of pros and cons of Parent PLUS loans can help you make a decision!