Student Debt Graduate

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For many college kids (and the parents putting them through college), student loans are a massive burden. Those graduating with student loans average $37,172 in debt, and this year's grads are 6% further in the hole than last year's. Given that The College Board reports tuition rising at a 3.4% rate despite low inflation, future college students seem destined to carry a tremendous debt burden after college.

That is, unless their parents jump in with them.

What are PLUS loans, and how can they help?

One option for students struggling to finance college is the PLUS loan, which is a federal loan that can be taken out by graduate students, professional students, and parents of dependent undergraduate students.

You may wonder why parents should take out student loans for their children in the first place. Shouldn't their kids cover their own college expenses?

Well, sometimes they can't. Dependent students may only borrow federal aid equal to $5,500 their freshman year, $6,500 their sophomore year, and $7,500 in their remaining years -- and they can't take more than $31,000 in total federal aid throughout their undergraduate career. If federal student loans, scholarships, and grant money don't equal a school's cost, then the student's up the creek without a paddle (or a shovel to dig them out of all that debt).

That's where PLUS loans can prove useful. Parents can take out a loan for the school's reported cost of attendance minus the amount of financial aid received. Therefore, parents can use these loans to cover expenses that students themselves can't cover.

Parent PLUS loan eligibility

A parent applying for PLUS loans must meet three criteria. First, their child must be eligible for aid (which they will be if they qualify for federal loans or grants). Second, they must be the student's adoptive or biological parent. Note that in some cases, being a stepparent can also guarantee qualification.

Third, the parent must not have an adverse credit history. You can check the student aid's website to see what may qualify as an adverse credit history. Unless you've had a significant credit issue, like bankruptcy, foreclosure, or a tax lien, then you're more than likely qualified. Even parents with an adverse credit history may still qualify in certain situations; there are a few options to still qualify for loans if credit is adverse.

What's the alternative to PLUS loans?

PLUS loans are one of two options for students without enough financial aid. The other option is private student loans, which come from private lenders such as Sallie Mae and Wells Fargo when students don't receive enough federal aid to fund their college.

PLUS loans and private loans differ on a few factors. PLUS loans have a fixed interest rate of 6.84%, while private loans have average interest rates of 9%-12%, according to alltuition. Additionally, the private loan's interest rate is determined in part by the borrower's credit score; the lower their score, the higher their interest rate, and this can result in students shelling out much more for the same degree.

Let's say you have $20,000 in student loans and repay $250 each month. If you take the loan out at a fixed 6.84% PLUS rate, then you'll pay the loan off in 8 years and 11 months, and your total interest paid will be $6,778. Meanwhile, if you take out a loan at a private rate of 9% -- the lower end of private loan rates -- then it will take you 10 years and 2 months to pay off the loan, assuming the same monthly payment. Even worse, you'll pay $10,657 in interest -- and that's a conservative estimate. .

Are PLUS loans a good idea? 

Parents should think hard about whether taking out a PLUS loan is the right option, as they can be dangerous. If you're even considering this option, you're thinking about going into debt at a time when you should be saving for retirement, which could turn out to be a big financial setback.

However, it could be even more financially disastrous if your child doesn't attend college. The Bureau of Labor Statistics reports that the average yearly income for those with a high school diploma is $35,256, while workers with a bachelor's degree earn an average of $59,124. If your child's on the cusp of affording college, a PLUS loan may put them over the edge so they can work their way toward a higher-paying job.

All things considered, PLUS loans should be a last resort that you only turn to after your child has committed to working part-time and exhausted all the scholarships, grants, and federal assistance available to them.

If your child still needs money for college, then it may be worth considering if they agree to pay you back for taking out the loan. If the PLUS loan provides a lower interest rate than a private loan, that could help save them money when they graduate, and being even slightly closer from the bottom of the hole may be a whole lot of help. 

Michael Schramm has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.