Parent PLUS loans are a type of federal loan offered to parents of students enrolled at least half-time in an eligible program. Although this loan is intended to cover the cost of the student’s tuition, students themselves cannot apply for this loan. Only their parents can borrow money through this option.

What Exactly Are Parent PLUS Loans And How Do They Work?

Parent PLUS loans are offered by the Federal Student Aid office. They are meant to help bridge the gap between a student’s financial aid package and the total cost of attendance. Federal student aid is often not enough to cover all expenses associated with attending college. If a parent wants to help out but can’t afford to pay out of pocket, they can borrow through a Parent PLUS loan.

Unlike all other forms of federal financial aid, the parent is the one who takes on a Parent PLUS loan. The parent in whose name the loan is taken out is fully responsible for repaying the loan.

Before taking on a Parent PLUS loan, it’s important to understand the pros and cons that come with it. This can help you make an informed decision about whether or not this is the right option for you.

Pros Of Parent PLUS Loans

• You can borrow as much as you need – With a Parent PLUS loan, you can borrow up to the student’s cost of attendance minus any other financial aid received. That acts as the borrowing limit. There’s no annual or other limit.
• The interest rate is fixed over the life of the loan – Parent PLUS loans are fixed rate loans. The rate is locked in at the time of taking out the loan and the monthly payments remain the same through the loan term. You don’t have to worry about monthly payments increasing even if national interest rates increase. This makes it easier to create a budget.
• The loan comes with generous deferment and forbearance options – Deferment and forbearance offer much relief during periods of financial hardship.
• There are a few different repayment options – Parent PLUS loans offer 4 types of repayment plans – Standard, Graduated, Extended, and Income-Contingent repayment plans. This allows you to increase or reduce your payments according to income.
• You can get a tax-free discharge under certain circumstances – The federal government offers a tax-free discharge if the parent borrower or college student dies before paying off the debt. You can also get a tax-free discharge if the parent borrower becomes permanently and totally disabled.

Cons Of Parent PLUS Loans

• You pay an origination fee – This can add to the cost of your loan. The origination fee is set at 4.22% of the principle amount as of Oct.1, 2020.
• Interest rates are much higher – Parent PLUS loans have the highest interest rates as compared to any other federal loans.
• The loan is unsubsidized – This means the interest starts accruing from the day the loan is disbursed. It keeps on accruing till the loan is fully paid off.
• The repayment period starts the day the loan is fully paid out – Unlike federal student loans, there is no grace period. You’ll have to make the first payment within 60 days of the final disbursement. You can request deferment but the interest keeps accruing even while payments are paused. This can add to the cost of the loan.
• The loan cannot be transferred to the student’s name – The parent who takes out a Parent PLUS loan is solely responsible for the payments till the debt is cleared off. The only way to transfer the loan to your student is by refinancing with a private lender. In order to do this, the student must meet the lender’s eligibility criteria for refinancing.

So Should You Take Out A Parent PLUS Loan?

Parent PLUS loans come with relatively harsh terms and higher rates. Fortunately, they are not the only option available for parents looking to help their college student financially. The other borrowing option worth looking into is private student loans. Which one is right for you will depend on several different factors, especially your financial circumstances. Understanding the key differences in how they work will help you make an informed decision.

Here’s how Parent PLUS loans compare with private student loans:

Eligibility criteria – Parent PLUS loans don’t have any minimum credit score requirements. The only reason you may be denied is if you have adverse credit. Private loans have more stringent requirements. Every lender sets their own criteria. Most will require borrowers to have a high credit score and low credit utilization ratio.

Interest rates – For PLUS loans, the rate is set by the federal government for each academic year. All parents who take a PLUS loan during that year pay the same interest rate. For private loans, lenders set the rate based on the borrower’s financial credentials. If your finances are strong, you’ll pay a low rate otherwise you’ll pay a much higher interest rate.

Loan fee – PLUS loans come with a loan fee that’s equal to a percentage of the loan. This adds to the cost of the loan. Private loans don’t have a loan fee.

Access to flexible repayment plans – Parent PLUS loans offer a range of income-based repayment plans. Private loans don’t offer this option.

Deferment and forbearance options – This is a standard option with Parent PLUS loans but not with private loans. Only a select few private lenders offer deferment or forbearance.

Fixed vs. variable interest rates – Parent PLUS loans come with a fixed interest rate. The rate and monthly payments remain the same over the life of the loan. With a private loan you can choose between fixed and variable interest rates.

When it comes to comparing Parent PLUS loans and private student loans, neither one is universally better than the other. If you need the additional funding take time to first understand how each one works and their pros and cons.

Most important of all, regardless of which loan you choose to take, be careful to borrow the minimum amount you need. Don’t be tempted to overextend just in case you may need it later. Taking on extra debt can lead to long term problems and send you spiraling further into debt.