Taking Out a Parent PLUS Loan? Read These 6 Pros and Cons First

 January 25, 2021
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Tuition costs have been steadily rising over the years, and parents are stepping in to help foot the bill. Among the Class of 2019, 14% of students’ parents borrowed an average of $37,200 in Parent PLUS Loans to help pay for college. So, what is a Parent PLUS Loan?

This federal student loan option is available for parents whose children are enrolled at least half-time in an eligible program. Also, the Parent PLUS Loan interest rate for 2020 dipped significantly, to 5.30%.

Although this type of loan is a useful financial tool for many parents, it isn’t necessarily the best option for everyone. Specifically, we’ll cover:

What is a Parent PLUS Loan?

The Federal Student Aid office offers Parent PLUS Loans to parents borrowing on behalf of their children. Parents can borrow up to the full cost of attendance of their child’s school minus any financial aid their child has already received.

The Parent PLUS Loan interest rate was 5.30% as of July 1, 2020, along with a 4.228% origination fee, as of Oct. 1, 2020. To be eligible, the borrower must have a child enrolled at least half-time in a Title IV school.

Plus, parent borrowers can’t have an adverse credit history. If they do, it is still possible to qualify by adding a creditworthy endorser to their loan application.

Although Parent PLUS Loans can be a useful way to cover a gap in funding, they come with both pros and cons.

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What are the pros of Parent PLUS Loans?

1. You can borrow as much as you need
2. Your interest rate will stay fixed over the life of the loan
3. You have a few different options for repayment

1. You can borrow as much as you need

Unlike other types of federal student loans, Parent PLUS Loans have virtually no limits when it comes to borrowing. You can borrow up to the cost of attendance minus any other financial aid received.

This can be helpful if your child’s financial aid package falls short or you can’t cover your Expected Family Contribution.

At the same time, you have to be careful to not take on too much debt. Since your borrowing is limited only by the cost of attendance, you run the risk of taking out more loans than you can afford to pay back.

Before finalizing your paperwork, crunch the numbers with our student loan calculators to ensure your budget can handle repayment.

2. Your interest rate will stay fixed over the life of the loan

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, you’ll be locked in with the rate you got when you first took out the loan.

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

Let’s 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, you’d 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 3.99% 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.

3. You have a few different options for repayment

Although Parent PLUS Loans have the disadvantage of an origination fee (see con No. 2, below), they win points for flexible repayment plans.

Parent PLUS Loans are eligible for the following plans:

  • Standard Repayment Plan: Pay your loans off with fixed monthly payments over 10 years.
  • Graduated Repayment Plan: Start with small payments that gradually increase over a term of 10 years.
  • Extended Repayment Plan: Pay fixed or graduated payments over 25 years.
  • Income-Contingent Repayment: If you consolidate first, you’ll pay 20% of your discretionary income or what you’d pay on a 12-year plan, whichever is lower. If you still have a balance left after 25 years, you could be eligible for student loan forgiveness.

As you can see, you have several options for repayment. They can make your monthly bills go higher or lower. You might make extra payments to pay the loan off as fast as possible or extend your term to 20 or 25 years for some financial relief.

These flexible repayment plans can be a lifesaver in the event you lose your job or run into financial hardship. Note that private student loan companies typically don’t offer these same protections, but some will allow you to pause payments through forbearance under certain circumstances.

If you’re concerned about your ability to pay back a parent loan, a federal Parent PLUS Loan might be the most accommodating option. But if you don’t anticipate trouble with repayment, you might prefer a private lender.

What are the cons of Parent PLUS Loans?

1. You have to pass a credit check
2. Parent PLUS Loans come with an origination fee
3. You’re expected to start repayment right away

1. You have to pass a credit check

Although you can borrow as much as you need with a Parent PLUS Loan, you first have to pass a credit check for approval. You don’t necessarily need excellent credit, but you can’t have an adverse credit history.

The Department of Education says you have adverse credit if any of the following applies:

  • You have debt greater than $2,085 that has been delinquent for 90 or more days or has been placed in collections within the past two years.
  • Your credit report shows one of the following in the past five years: default; discharge of debt in bankruptcy; foreclosure or repossession; tax lien or wage garnishment; write-off of a federal student debt.

Even with adverse credit, you could still qualify for a Parent PLUS Loan by applying with a creditworthy endorser. An endorser acts like a cosigner; they’re equally responsible for the debt in case you miss payments.

Besides this credit check, Parent PLUS borrowers must also meet the general eligibility requirements for federal aid, including being a citizen or U.S. national.

As long as you meet these requirements, you should qualify for a Parent PLUS Loan.

2. Parent PLUS Loans come with an origination fee

On top of interest, you might also consider the added expense of an origination fee. As of Oct. 1, 2020, all Parent PLUS Loans come with an origination fee of 4.228%.

If you borrowed $30,000, you’d pay an origination fee of $1,324.40. That extra fee is a considerable expense on top of all the interest you’ll be paying.

Since many private student loans don’t come with an origination fee, it’s worth comparing your options so you can find a loan with the lowest borrowing costs.

3. You’re expected to start repayment right away

When your child takes out a student loan, they typically don’t have to start paying it back while they’re still in school or for six months after graduation.

But what is a Parent PLUS Loan’s timeline for repayment? It turns out you have to start paying back a Parent PLUS Loan right away. Repayment kicks in right after your entire loan has been paid out.

That said, it’s possible to apply for student loan deferment while your child is in school and for six months after they graduate.

If you’re granted a deferment, remember that interest will continue to accrue on your Parent PLUS Loan even while payments are paused.

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Compare your options to find your best student loan for parents

Parent PLUS Loans are a useful option for parents looking to help their children pay for college. They’re relatively easy to get, and you can borrow as much as you need.

But along with the benefits of Parent PLUS Loans also come some potential disadvantages, such as an origination fee and an interest rate that could be higher than one you could get from another lender.

Make sure to consider private student loans with potentially better terms or rates to ensure you’re not wasting money on interest and fees.

Andrew Pentis contributed to this report.

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