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10 Minute Read

How Does a Parent PLUS Loan Work?

10 Minute Read

What is a parent plus loan

A Parent PLUS Loan is anything but a plus for your financial goals. In fact, this kind of borrowing is a special kind of toxic because it involves a student and their mom or dad. The only thing worse than debt is the kind that hangs over a family relationship! But don’t freak out if you’re already in one. There are steps you can take to pay it off fast. And if you’re just considering taking on a Parent PLUS Loan, we’re going to talk you through how it works—and how it fails.

What Is a Parent PLUS Loan?

A Parent PLUS Loan is a federal loan offered to the parents of dependent undergrads. Why did they throw the “PLUS” into the name? That’s just marketing to help you feel better about going deeply into debt—kinda like calling a credit card that charges you 20% interest “Platinum.” But PLUS is also an acronym that stands for Parent Loan for Undergraduate Students.

Ready for some basic facts about the Parent PLUS Loan? Here we go:

  • The interest rate is fixed. For the 2020–21 school year, it’s set at 5.30%.
  • The purpose is to “help” students who were already denied a private loan (which at least have lower interest rates) to borrow money in another way—by getting a parent like you on the hook for the debt!
  • Enjoy paying fees for the privilege of debt? PLUS Loans have ‘em! The origination fee to take out a PLUS Loan disbursed for fall 2020 is 4.236% of the debt. Borrowing $25,000 (a typical price) for your daughter’s first year of school? That’ll be $1,000 right off the top—or more often chucked into the principal before her first chemistry lab.
  • The amount you can borrow with a PLUS Loan is much higher than other types of student loans. You can literally borrow up to the full price of your child’s school of choice, minus any financial aid they’ve already been awarded.1

One of the biggest money lies most people believe is that borrowing to get a degree is “good debt.” Bogus! We never recommend debt, and here’s why: Debt delays your dreams. It doesn’t matter if you’re the student or the parent of someone planning for college—nobody wins by going into debt. Even if it does speed up your access to a degree, it also postpones most of the primary adulting dreams—things like buying a home, getting married or planning for retirement.

Going to college debt-free is possible! Find out how.

Parent PLUS Loans are no different. They may seem wiser or less risky than other kinds of student loans because they depend on a parent’s income. But that’s not a safe assumption! The truth is you can’t justify putting yourself at risk financially for the sake of getting your child a college degree. (We’ll also talk later about the smart ways to pursue a degree without debt!)

Parent PLUS Loan Eligibility

Parent PLUS Loans really are limited just to the student’s parents, as that relationship is legally defined. Here are a few edge cases.

Other Family

Nope. Just parents. No other relatives can take one out for a student. Which rules out Uncle Hank for a Parent PLUS Loan, unless he’s actually adopted his niece and just wants to get into debt for some reason.

Dependent Students

Is your college-bound son already out on his own supporting himself? Good for both of you! In that case you’ll be glad to learn that you can’t get a PLUS Loan for an independent student. Trust us, you’ll both be happier with less dependence on mom and dad—and no debt!

Divorce

In the case of parents who have been through divorce, both parents are able to take out separate Parent PLUS Loans. The total borrowed, though, is still determined by the student’s total cost of attendance minus financial aid.

Stepparents can also take out a Parent PLUS Loan, but only as long as they remain married to the student’s parent.

Adverse Credit

Parents with “adverse credit” as defined by the Federal Student Aid office need not apply. Here are a few disqualifiers:

  • Being delinquent (over 90 days behind) on more than $2,085 in total debt
  • Having more than $2,085 in debts written off during the two years prior to the PLUS Loan
  • Experiencing any of the following within the past five years:
    • Wage garnishments
    • Default determination
    • Tax lien
    • Bankruptcy
    • Repossession
    • Foreclosure
    • Write-off of federal student aid debt

We’re always glad to see debt stopped before it starts! But don’t think those rules stop the government from finding creative ways to lend to you anyway! They’re willing to overlook everything if you just get a friend with better credit to endorse your application! Yeah. We’re talking about calling up a work buddy to see if he’ll agree to cosign your son’s college debt. Could there be anything dumber than risking your finances and a friendship in one move? We don’t think so.

How to Apply for a Parent PLUS Loan

Are you still thinking about applying for one of these monsters? Hopefully not. But maybe you enjoy horror stories . . . or rubbernecking fender-benders! If so, let’s go over the steps to apply for a Parent PLUS Loan.

Step 1. Have your student complete a FAFSA. If you don’t know, that’s the Free Application for Federal Student Aid. It’s found on the Federal Student Aid website. This is a good thing to do even if you and your child aren’t applying for any loans, because it’s necessary for receiving any form of financial aid, including scholarships and grants.

Step 2. Complete the Application. The exact title is the Direct PLUS Loan Application for Parents. (Can you guess who fills it out? Yes, you.) That’s also found on the Federal Student Aid site. This is also where you decide how much you want to borrow—which is obviously zero. If you were going to pull the trigger here (don’t do it, people!), you would need to authorize a credit check.

At that point, the Department of Education will be in touch if you have adverse credit. That’s because they really want you to get this loan! They’ll tell you how you can appeal an adverse credit finding, or go find a cosigner. But we know you’re too smart for that.

Step 3. Sign the Master Promissory Note. That’s the terms and conditions for paying back your loan. You’ll see it there on the same government website as the application. We really hope you haven’t reached this step because once you sign, you (or your child if you’re splitting the repayment) will be locked in for at least 10 years of loan payments, and who knows how much in interest.

What Does Parent PLUS Loan Repayment Look Like?

This is the part they don’t tell you about on campus visits or in glossy college catalogs—you have to pay back whatever you borrow, and then some! Millions of people every year go to college, forgetting there’s a high price to pay since there are no immediate bills coming in.

And while students with private loans can live in that bubble as long as they’re in school, the same doesn’t hold for people with Parent PLUS Loans. The repayment schedule begins as soon as the college receives the money. It’s as punctual (and about as welcome) as a credit card bill.

As with any debt, you should pay off a Parent PLUS Loan as fast as you can. And the best way to do that is to put it on a list with all of your other debts, and focus all extra money on the smallest amount first—even if that’s not your PLUS Loan. Everything else gets the monthly minimum until you’ve eliminated that first debt. Then you roll what you’d been paying on that one to the next smallest. (We call it the debt snowball!)

 Here are the options for PLUS payback:

  • You can choose to defer repayment. In other words, you can take the college approach when you’re already supposed to be grown up. But keep in mind you can only put payments off for as long as your student is in school and six months past graduation. Meanwhile, even if your PLUS gets a deferment, the interest you owe on it keeps on growing anyway. Don’t stay in debt any longer than necessary. Start payments immediately. Big ones!
  • Standard repayment. Fixed monthly payments over a 10-year term. No debt is good, but this is the least bad (which is to say, the fastest) option. Just so we’re clear, you are allowed to send more than the monthly minimum. If you’ve already signed your name to the debt, run like a gazelle to get out of it.
  • Graduated repayment. Still takes 10 years, but the payments start small and go up until the payoff date. This makes no sense, and also goes against the debt snowball method. We don’t recommend it. (But it’s way better than the next two turkeys.)
  • Extended repayment. How would you like to spend 25 years paying off your child’s student loans? Now’s your chance. Fixed or graduated options are both available for people who like signing up for dumb ways to kill their financial futures.
  • Income-contingent repayment. You have to first consolidate your PLUS Loan into a Direct Consolidation Loan with any other student loans you have as the parent. (Parent PLUS Loans cannot, repeat cannot be consolidated with the federal loans of the student, because they are their own person with their own loan obligations.) If you do that, your payment amount will become either 20% of your discretionary income, or the defined payment for a 12-year term, whichever is lower. This is very similar to extended repayment, but with a flimsy offer that you could get some of the debt forgiven many years from now. (This almost never happens.) Again, it’s a 25-year term—you’ll be a grandparent long before this gets paid off. Focus on paying it off quickly, and forget about the gimmicks and delays.2

If you’re already in a Parent PLUS Loan, there is one solid approach we would recommend for some people, and that’s refinancing. But it’s only a good option if your loans are delaying other goals (like funding retirement or cash flowing college for the next kid on the list). Refinancing will help you pay off your student loans faster by getting you into a shorter term, with a better fixed-interest rate. That means you can focus on becoming debt-free and attacking your next financial goals.

What Happens if You Don’t Pay a Parent PLUS Loan?

A Parent PLUS Loan will enter default after 270 days of nonpayment. At that point, you could be facing wage garnishment, or having Social Security payments or tax refunds withheld to cover the debt.

The best way to avoid those troubles is to steer clear of debt completely. The next best approach is to pay it all off as fast as possible.

Is a Parent PLUS Loan a Good Option?

Absolutely not! Hopefully you’ve seen for yourself that debt doesn’t pay. Instead, you and your child should be pouring all your effort into finding ways to cash flow college with scholarships, grants and your own savings. Want an amazing resource from an expert on making college affordable? Of course you do. It’s called Debt-Free Degree—and it’s packed with tips and solutions to all of your questions about covering college without loans.

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