The Pros and Cons of Parent PLUS Loans
Due to the rising costs of higher education, more and more Americans are turning to student loans. In fact, student loan debt has tripled over the past fifteen years—climbing to almost $1.7 trillion dollars in 2023. This staggering number has sparked many philosophical and economic debates. But for most families, it’s personal. You want your child to pursue their education. So how do you help?
While most student loans are taken out by the student, parents can borrow on their child’s behalf. If you’d like to alleviate your child’s loan debt by taking on some yourself, you’re in the right place. Let’s explore the pros and cons of the U.S. Department of Education’s parent PLUS Loan.
What is a parent PLUS loan?
Parent PLUS Loans are a type of federal student loan for parents or guardians of a dependent undergraduate student. You must be a U.S. citizen or permanent resident to be eligible. Through the Direct loan program, parents borrow money from the U.S. Department of Education to pay for their child’s education. Federal parent PLUS Loans differ from other student loans in that the borrower is the parent, not the student. Unlike other federal loans, parent PLUS Loans are not based on financial need, and they can be used to cover the full cost of attendance.
Parent PLUS loan pros and cons
As a parent, a big part of your role in your child’s college application process will be to help them understand the financial side of things. Instead of spending hours parsing through different types of loans, check out the cheat sheet we’ve put together on the parent PLUS loans.
You may have heard that federal loans are more favorable than private loans. And in most cases, that’s true. But what makes the parent PLUS loan so great?
Fixed interest rates
The hallmark “pro” of all federal student loans is that the interest rate is fixed for the life of the loan. This means the interest rate you’ll pay will always remain the same. With private student loans, interest rates can be fixed or variable. Variable interest rates fluctuate with national interest rates, which means they can be unpredictable and harder to budget for. With federal loans, your interest rate is fixed. Even if it takes twenty years to repay your loan, the interest will never change. Today, the interest rate for parent PLUS loans is 7.54%.
For the parent PLUS loan, you’ll also pay an origination fee, which is currently 4.228%. This one-time fee is charged to cover the costs of processing your application, opening a new account, etc. It will be taken out of your loan disbursement.
Flexible repayment plans
Federal student loans offer a number of generous and flexible repayment options. For the parent PLUS loans, you can choose from three different types of student loan repayment plans:
- Standard repayment plan: The shortest repayment plan. Incur the least amount of interest and pay your loan off as fast as possible. Payments are fixed at a minimum of $50/month for up to 10 years.
- Graduated repayment plan: Monthly payments start out low and increase over time. A great option if you expect your income to increase over the years.
- Extended repayment plan: The slowest repayment plan with the lowest monthly payments.
Parent borrowers can consolidate their parent PLUS loan into a Direct Consolidation Loan and then become eligible for an income-contingent repayment plan. These plans allow borrowers to pay back their student loans in line with their income, which can be a great way to ensure your loan payments don’t outpace your income.
Defer loan payments while your child is in school
Many student loans offer a grace period that defers payment while the student is enrolled in school. For parents who request deferment (which you can do during the loan application process), you avoid paying back your parent PLUS loan as long as your child is enrolled in school at least half-time. Keep in mind, you are responsible for paying the interest that accrues during this period since Direct PLUS Loans are not subsidized by the government.
Eligible for student loan forgiveness
Parent borrowers taking out federal student loans are also eligible to have loans forgiven. The two primary programs for student loan forgiveness are:
- Public Service Loan Forgiveness: If you work for the federal government or a non-profit organization, you could qualify. You’ll need to have made 120 qualifying monthly payments while working for an eligible employer.
- Teacher Loan Forgiveness: If you teach full-time for five or more years in a qualifying school district, you could be eligible to have up to $17,500 of your loans forgiven.
There are a handful of other reasons why your loans could be forgiven but only federal loans are eligible for these programs.
Eligible for federal borrower protections
Federal loans carry borrower protections like forbearance and deferment, which allow you to temporarily pause your student loan payments during periods of hardship. While some private lenders may offer these programs, they’re not required to.
On top of this, relief plans like the Biden-Harris Debt Relief Plan apply to federal loans, but not private ones. That goes for temporary relief plans like the one offered during the COVID-19 pandemic, too.
Maybe the most appealing borrower protection offered by the federal government is the ability to repay your loans based on your income, known as income-driven repayment. Income-based repayment plans are calculated based on income and family situation, and they are capped at a certain percentage of your income to avoid making loans a source of hardship for you and your loved ones.
Interest rates not based on credit
While borrowers need to pass a credit check to be approved for a parent PLUS loan, the interest rate you’ll receive will not be based on your credit report. In contrast, credit score is the primary determining factor for interest rates on private student loans. That means that if you don’t have great credit, you’ll be stuck paying a higher interest rate if you don’t have the help of a cosigner. On the other hand, the interest rate is the same for all parent PLUS loan borrowers.
No borrowing limits
With parent PLUS loans, there’s no cap on the amount you’re able to borrow. You should exhaust other federal loans first, as they carry more favorable interest rates. But if you still have a gap to fill, you could borrow the rest via the parent PLUS loan. For many families, the parent PLUS loan can be a great option to turn to before private student loans.
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Before you sign on the dotted line, there are a few drawbacks to the parent PLUS loan that should be on your radar.
No borrowing limits
The downside of being able to borrow as much money as you need? You could go overboard. While it might feel like free money right now, student loans will need to be repaid with interest. Even with the lower interest rates guaranteed by federal student loans, interest can add up over time. While it can be tempting to borrow the full amount, it’s wiser to only borrow exactly the amount you need.
Requires a credit check
Most federal loans don’t require a credit check. The exception is the parent PLUS loan, and having adverse credit history could impact your eligibility. You don’t need a specific credit score to qualify, but the government will look for negative events on your credit report, like foreclosures, wage garnishment, or other debts in default, to determine if you’re a responsible borrower.
Could require an endorser
If you are deemed ineligible due to your credit history, you can appeal the decision or find an endorser with better credit. An endorser is similar to a cosigner in that they agree to take over the loan payments if you’re unable to repay your loan. As a parent, your endorser cannot be your child on whose behalf you’re requesting the loans. You’ll want to look to a trusted family member or friend who’s willing to step in for you if times get tough financially.
Can’t transfer the loan to your child
Unless you refinance your loan through a private lender, it’s not possible to transfer the burden of loan repayment to your child. Refinancing could mean giving up your fixed interest rate (though some private lenders do offer fixed rates) as well as access to federal protections and repayment terms. If you might want to transfer the loan to your child in the future, think twice about signing up for a parent PLUS loan.
Higher interest rates than other federal loans
Compared to private loans with variable interest rates, the interest rate of the parent PLUS loan is low at 7.54%. But in comparison with other federal student loans, like the Direct Unsubsidized loans which is 4.99%, it feels high. Over time, there’s a big difference between 7.54% and 4.99%.
For example, let’s say you’re taking out a $20,000 loan that you want to pay back over 20 years.
- With a direct unsubsidized loan at a 4.99% interest rate, you’ll ultimately pay $31,651.37.
- With a parent PLUS loan at a 7.54% interest rate, you’ll ultimately pay $38,785.96.
With the parent PLUS loan, you’d be paying thousands of dollars more in interest than the unsubsidized federal loan. For some families, it might be a better option to take out a loan in the student’s name to access these lower fees.
How do I get a Parent PLUS loan?
To apply for a parent PLUS loan, your child must have completed the Free Application for Federal Student Aid (FAFSA®). Then, you can apply online for the loan. It’s a simple application that takes approximately 20 minutes to complete. And if your child’s school has a different application process, you should be able to find out the details via the online form, too.
To complete the application you’ll need to provide the following information:
- Parent’s Verified FSA ID
- Requested Loan Amount
- School Name
- Student Information
- Personal Information
- Employer’s Information
After your application is complete, the federal government will perform a credit check. If you placed a freeze on your credit report, you must remove the freeze to submit the parent PLUS loan application. Your application cannot be processed without a credit check.
Should I get a parent PLUS loan?
Maybe. The answer is complex and depends upon your personal financial situation. Before you explore the parent PLUS loan, do a few things:
- Max out financial aid: Each year, your child should complete the FAFSA®, which will enter them for federal student loans, scholarships, and grants. Filling out the FAFSA® can be tricky, so Going Merry has a program to walk you through the application and avoid errors that lead to missing out on aid.
- Exhaust all other options for reducing cost: Explore private scholarships, part-time jobs, earning college credit while still in high school, or even community college.
- Help your child take out other Federal Direct student loans: If your child has qualified for other federal student loans via FAFSA® like the direct subsidized or unsubsidized loans, turn to them first. These direct subsidized or unsubsidized loans offer much lower interest rates. Even if the loan is in your child’s name, you can help with the payments.
- Check that you can’t get a better link with a private lender. Since Parent PLUS loans offer one interest rate for all parents, if you have better-than-average credit, you might actually find you get a better deal by going with a non-governmental private student loan. The only way to know is by shopping around and getting interest rate estimates with various companies. (Here’s one from our partner Earnest.)
If you and your family still have a gap to fill between your child’s expected cost of attendance and other funding sources, pursue the parent PLUS loan. But before you borrow any money, get organized. Calculate how much money you need. Use one of the loan calculators found online to determine your monthly payments. Assess your finances. Create a detailed plan to afford the loan. And remember: the burden of repayment is on you. Not your child.
If you can afford the payments and want to get involved in your child’s college finances, think of the parent PLUS loan as your final option before you pursue private loans.
Get matched to scholarships with Going Merry
Federal student loans can be a lifesaver. They allow your child to pursue their degree without worrying about how to afford it today. And for a number of families, the pros of the parent PLUS loan outweigh the cons. No matter if you choose to pursue this loan option or not, scholarships should be a part of the equation.
Unlike loans, scholarships never need to be repaid. Going Merry curates thousands of high-dollar awards that are applicable to a variety of students. Explore our offerings and encourage your child to create a profile. When they do, we’ll send awards that match their eligibility profile straight to their inbox. Going Merry takes the guesswork out of the college application process. We’ll help you complete the FAFSA®, understand different student loans, access quality scholarships, and so much more. Sign up for Going Merry today.