A Direct PLUS Loan is a type of student loan made by the U.S. Department of Education. Direct PLUS Loans can be made to parents of dependent students as well as graduate students. Although both types are officially called Direct PLUS Loans, when they're made to a parent borrower, they are commonly referred to as Parent PLUS Loans. However, it's important to point out that “Parent PLUS Loan” isn't an official title.
PLUS Loans are designed as a supplement to other forms of student aid. For example, if there's still a financial need after any scholarships or grants a student receives, and he or she has maxed out their borrowing ability when it comes to Direct Subsidized and Unsubsidized Loans, PLUS Loans can help bridge the gap.
A Parent PLUS Loan is the legal responsibility of the parent, not the student. The parent is responsible for repaying the loan as agreed, and the responsibility cannot be transferred to the student.
PLUS Loans are paid directly to the school, where they are applied to any tuition, fees, or other charges on the student's account. If there is money remaining after all of the school's charges are settled, any remaining funds will be distributed to you (the parent) or to the student, depending on how you set the loan up when you apply.
Who can get a Parent PLUS Loan?
Obviously, to obtain a Parent PLUS Loan, you must be a parent of a college student (biological or adoptive) or must be the spouse of the student's parent. Grandparents aren't eligible, unless they've legally adopted the student.
You must also be a U.S. citizen, national, or permanent resident, and must be in generally good standing with any other federal student loans and grants you may have.
While I wouldn't exactly call the credit standards used when applying for Parent PLUS Loans tough, it's important to realize that unlike Direct Loans made to college students, Parent PLUS Loans are credit-based.
One of the requirements is that the applicant cannot have an adverse credit history, which is specifically defined as:
- Having one or more debts with a combined balance greater than $2,085 that are 90 or more days delinquent or have been placed in collections or charged off within the previous two years.
- Or, having an adverse action such as a foreclosure, repossession, tax lien, or wage garnishment within the preceding five years.
How much can I borrow?
The short answer is that the maximum amount you can borrow with a Parent PLUS Loan depends on where your child is going to school.
Each school determines an overall cost of attendance each year. The maximum PLUS Loan you can obtain is determined by this amount minus any other financial aid your child receives. And to be perfectly clear, the terms on Direct Subsidized and Unsubsidized Loans are far better than those offered on PLUS Loans, so it's generally a good idea for your student to max out their own federal student loan borrowing ability.
Here's an example of how this works. My alma mater, the University of South Carolina, estimates its 2018–2019 cost of attendance for on-campus students to be $29,880. This includes tuition, fees, housing, means, books, school supplies, transportation, and other miscellaneous expenses for the fall and spring semesters.
Let's say that your student is a second-year undergraduate at this school. We'll say that your student has $4,000 in various scholarships and grants, and as a second-year dependent student, they can borrow as much as $6,500 in Direct Loans. Subtracting these other forms of aid from the school's cost of attendance shows that the maximum PLUS Loan a parent can obtain is $19,380 for the school year.
It's important to consider that you may not need to borrow the maximum. For example, if you have money in savings that you can use, take this into account when applying. Keep in mind that everything you borrow will be subject to fees and interest, as I'll discuss in the next section.
How much do Parent PLUS Loans cost?
There are two main costs associated with Parent PLUS Loans -- the interest rate and the loan fee.
First, just like other types of federal student loans, Parent PLUS Loans come with fixed interest rates that are set for loans disbursed during each school year. Without getting too deep into how it works, the interest rate is essentially set as the 10-year Treasury note yield plus a certain premium. For the 2018–2019 school year, the PLUS Loan interest rate is set at 7.6%, and this applies to loans first disbursed on or after July 1, 2018 and before July 1, 2019.
The other cost is the “loan fee,” which is similar to an origination fee charged by a mortgage or auto lender -- it's a fee designed to compensate the lender for the costs incurred while making the loan. The loan fee also changes each year (although the period runs from Oct. 1 through Sept. 30).
For loans first disbursed from Oct. 1, 2018 through Sept. 30, 2019, the PLUS Loan fee is 4.248%. This fee is deducted from each loan disbursement. For example, if you obtain a PLUS Loan for $10,000 before Sept. 30, 2019, only $9,575.20 will actually be sent to your child's school.
How does repayment work?
When applying for a Parent PLUS Loan, you can request a deferment while your child is in school. In this case, you won't have to start making loan payments until they leave school, graduate, or drop below half-time enrollment.
However, it's important to mention that you need to request a deferment if this is what you want. Otherwise, you'll be responsible for making payments as soon as the loan is fully disbursed.
Parent PLUS Loan borrowers can choose from the standard (10-year) repayment plan, the graduated repayment plan (which starts with lower payments that gradually increase), or the extended repayment plan (up to 25 years). Generally speaking, Parent PLUS Loans aren't eligible for income-driven repayment plans, but the exception is that if you consolidate the loans into a Direct Consolidation Loan, they could be eligible for the Income-Contingent Repayment (ICR) plan, which limits the monthly payment to a certain percentage of your discretionary income.
If you're having trouble repaying a Parent PLUS Loan, you may be able to request a deferment or forbearance to temporarily reduce or stop your loan payments.
Could private-sector alternatives be better?
Parent PLUS Loans certainly have some advantages, such as the ability to defer repayment in tough times, to choose from several repayment plans, and the ability to qualify with less-than-excellent credit.
Having said that, Parent PLUS Loans are a bit on the expensive side, especially in terms of the loan fee. An origination fee of over 4% on any type of loan would generally be considered high. So it may be a good idea to explore the options offered in the private sector.
There are several private student loan lenders that offer loans to parents of college students, and many of them have far better terms than Parent PLUS Loans offer. For example, College Ave makes loans to parents with no origination fees whatsoever, terms of up to 15 years, and relatively low APRs for borrowers with strong credit. Wells Fargo offers a similar parent loan product, and also offers an additional discount for parents who have an existing relationship with the bank. The point is that while a Parent PLUS Loan can certainly make sense for many borrowers, it's a smart idea to shop around.
How can you apply for a Parent PLUS Loan?
Parents can apply for a Direct PLUS loan online with the Direct PLUS Loan Application for Parents. The entire application process should take you about 20 minutes, and it's important to note that the application must be completed in one session -- so you can't save your work and come back later.
On the Direct PLUS Loan application, you can request to defer repayment while the student is still attending school, as well as a six-month grace period once the student leaves school or drops below half-time enrollment. You can also specify whether you want any excess loan proceeds paid to you or to your student after tuition, fees, and other expenses are paid to the school.
After you apply, you'll have to sign a Master Promissory Note (MPN), which is a document that essentially says that you agree to the loan's terms and to repay the loan as agreed.