College is more expensive than ever. According to the College Board’s report on trends in college pricing, the cost of a year at a public four-year school has risen by nearly $5,000 in the past 10 years.
With that high cost, it’s understandable that parents want to help their kids foot the bill. If you’ve decided to take out loans to pay for your child’s schooling, you’ve likely heard about Parent PLUS Loans, a popular option for parent student loans.
However, you might be confused on key points: How does a Parent PLUS Loan work? Who’s responsible for making the payments? Does having a PLUS Loan damage my credit? Find the answers to these questions and more below.
What are Parent PLUS Loans?
Unlike private student loans, which are issued by a bank or financial institution, the government issues Parent PLUS Loans. Parent PLUS Loans are a form of federal financial aid specifically designed for parents of current students.
To take out a Parent PLUS Loan, you must meet the following eligibility criteria:
You must be the biological or adoptive parent of the student. In some cases, stepparents can also qualify.
The student must be a dependent.
Your child must be enrolled at least half time in an undergraduate program.
You cannot have an adverse credit history.
With a Parent PLUS Loan, you can borrow up to the full cost of attendance minus any other financial aid your child received.
How does a Parent PLUS Loan work? What you need to know
Parent PLUS Loans differ from other forms of federal aid in many different ways. These are the five key things you need to know about Parent PLUS Loans.
1. Responsibility for payments
When you take out a Parent PLUS Loan, you’re solely responsible for repaying the loan. The student has no legal or contractual obligation to make payments. You cannot transfer the loans into your child’s name unless you pursue student loan refinancing with a private lender.
2. Impact on credit
Taking out a Parent PLUS Loan can affect your debt-to-income (DTI) ratio. Your DTI is the recurring monthly debt payments you have relative to the amount of money you have coming in each month.
Whenever you apply for a loan or credit card, the lender looks at the DTI ratio to determine your ability to afford your payments. A Parent PLUS Loan can hurt your DTI ratio, making it harder to get a mortgage, car loan, or new credit card.
If you fall behind on your Parent PLUS Loan payments, you could end up in default. Entering default can damage your credit report and lead to wage garnishment.
3. Availability of repayment plans
If you have trouble keeping up with your payments under the 10-year Standard Repayment Plan, there are three alternative repayment plans available to you:
- Graduated Repayment: With a graduated plan, your payments start small and grow every two years. Your loans are still paid off within 10 years.
- Extended Repayment: With an extended plan, your payments are spread over 25 years rather than 10. You must have at least $30,000 in outstanding student loans to qualify for this option.
- Income-Contingent Repayment (ICR): As a PLUS Loan borrower, you’re only eligible for ICR if you first consolidate your loans with a Direct Consolidation Loan. Under the ICR plan, the repayment period is 25 years instead of 10.
You can use Federal Student Aid’s Repayment Estimator to calculate your monthly payment and how much you’d pay in interest with each of the repayment plans.
4. Interest charges
With an interest rate of 7.00% as of Oct. 1, 2017, Parent PLUS Loans are one of the highest interest loans the government offers. That’s why it’s a good idea to help your child select other forms of aid, such as Direct Subsidized Loans, before applying for a Parent PLUS Loan. Direct Subsidized Loans have an interest rate of 4.45% as of July 1, 2017.
5. Disbursal fees
There’s a loan fee for all Parent PLUS Loans. The fee is a percentage of the loan amount that the government deducts from each disbursement. As of Oct. 1, 2017, the loan fee is 4.264% of the loan total.
For example, if you borrowed $7,000 to pay for the current semester, the loan fee would be $298.48. That amount would be deducted from your loan before disbursal, so you’d receive just $6,701.52.
Paying for school
When researching “How does a Parent PLUS Loan work?” and your other financing options, keep in mind that federal loans are not the only parent loans available. Depending on your credit score and income, you might qualify for a private parent loan with a lower interest rate, helping you save money over time.
Need a student loan?Here are our top student loan lenders of 2018!
|1 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or Nationwide Bank, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 11/1/2018. Variable interest rates may increase after consummation.
2 Important Disclosures for Discover.
3 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for PNC.
PNC Bank is one of the nation’s largest education loan providers. For over 40 years, PNC has been committed to helping students and their families make possible the adventure of college.
6 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2018 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
7 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
8 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
9 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.94% – 12.78%1||Undergraduate, Graduate, and Parents|
|4.04% – 13.04%3||Undergraduate and Graduate|
|4.34% – 12.99%2||Undergraduate and Graduate|
|4.25% – 11.10%*,4||Undergraduate and Graduate|
|5.03% – 11.23%5||Undergraduate and Graduate|
|4.12% – 13.13%6||Undergraduate and Graduate|
|4.92% – 10.01%7||Undergraduate and Graduate|
|3.72% – 9.68%8||Undergraduate, Graduate, and Parents|
|4.26% – 12.13%9||Undergraduate, Graduate, and Parents|