Tuition costs have been steadily rising over the years. The College Board estimates that the average cost of a four-year private college has risen by over $3,000 over the past five years.
Given these steep costs, parents are stepping in to help foot the bill. As of the end of 2017, about 3.5 million parents have borrowed a collective $83.9 billion in Parent PLUS Loans from the federal government, according to the Office of Federal Student Aid.
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.
Although this type of loan is a useful financial tool for many parents, it isn’t necessarily the best option for everyone.
What is a Parent PLUS Loan?
Before you apply for a Parent PLUS Loan, consider these six important pros and cons.
Pro: 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 not to take on too much debt. Since there’s virtually no cap on borrowing, 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.
Con: 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 U.S. citizen or U.S. national.
As long as you meet these requirements, you should qualify for a Parent PLUS Loan.
Pro: Your interest rate will stay fixed over the life of the loan
Like other federal student loans, a Parent PLUS Loan comes with a fixed interest rate that stays 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, 2017, Parent PLUS Loans come with a 7.00% interest rate.
Let’s say you took out a total of $30,000 in Parent PLUS Loans with a 7.00% rate. If you paid it off on a 10-year standard repayment plan, you’d pay a total of $11,799 in interest.
If you could qualify for a rate lower than 7.00%, you could save money over the long run. If not, then a Parent 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.
Con: 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, 2017, all Parent PLUS Loans come with an origination fee of 4.264%.
If you borrowed $30,000, you’d pay an origination fee of $1,279.20. 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.
Pro: You have a few different options for repayment
Although Parent PLUS Loans have the disadvantage of an origination fee, 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 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 student 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.
Con: 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.
Compare your options to find the 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 lenders with potentially better terms or rates to ensure you’re not wasting money on interest and fees.
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