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Parent PLUS Loans... What Are They and How to Pay Them Off
October 10, 2017
Many parents are may find that the financial aid package their college bound child has applied for will not cover the total cost of their child’s education and they do not have the funds to pay for it out of pocket. However, Parent PLUS loans, offered by the federal government, are specifically designed for parents to fund their child’s education by borrowing money in the parent’s name. Be aware that this loan cannot be transferred into your child’s name later. It is the parent’s loan.
What is a Parent PLUS loan?
Parent PLUS loans are federal loans that carry the highest interest rate of all federal loans. They are an option for students who need to cover additional expenses for college including tuition, room and board, books and supplies, as well as transportation for students at either the undergraduate or graduate level.
The downside is that interest rate on the Parent PLUS loans will be increased to 7.0% starting July 1, 2017 and, in addition, the Parent PLUS loans carry a 4.3% up-front disbursement fee. This is up-front disbursement fee, depending on the repayment plan you chose, means that the APR on Parent PLUS loans issued after July 1, 2017 will be approximately 8%.
It may be worth considering competitive offers from private lenders, who also offer student loans to undergraduates, graduate students and parents. It’s a good idea to do some research regarding your loan options. You could end up paying a hefty interest rate on the money you do borrow if you have hit your limit on more affordable loans.
In order to apply for a Parent PLUS loan, you and your child will need to complete FAFSA, Free Application for Federal Student Aid, first. It is the best way to ensure you receive financial help to pay for your child’s education. The FAFSA is free and relatively easy if you are prepared to complete the application.
Applying for a Parent PLUS loan
The FAFSA may look long and intimidating but it’s really easy if you’re prepared.
In order to complete the FAFSA you will both need:
Your Social Security Number
Your Alien Registration Number (if you are not a U.S. citizen)
Your federal income tax returns, W-2s, and other records of money earned. (Note: You may be able to transfer your federal tax return information into your FAFSA using the IRS Data Retrieval Tool.)
Bank statements and records of investments (if applicable)
Records of untaxed income (if applicable)
An FSA ID to sign electronically.
You can go to the official government site www.fafsa.gov to complete the online application.
If you meet all the eligibility criteria for a Parent PLUS Loan, you will also be required to sign a Direct PLUS Loan Master Promissory Note (MPN), agreeing to the terms of the loan. Graduate or professional students must also complete entrance counseling unless they have already taken out a PLUS loan.
In addition, your college bound student will need to contact the school to request a Direct PLUS loan. Many colleges require applying online at www.studentloans.gov but the best way to know your child’s college process regarding PLUS loans is to contact them directly.
Once you have received approval for Parent PLUS loan, the college will use the loan to pay for expenses included in your cost of attendance. This typically includes tuition, room, board and books etc. If there is any money left over once your expenses have been taken care off, your school will give you the funds to use towards any other educational expenses. However, it is best to only borrow what you need.
Parent PLUS loans are available only to graduate or professional students who are enrolled at least half-time at an eligible school, or to parents of dependent undergraduate students who are enrolled at least half-time at an eligible school. In order to get approved for a Parent PLUS loan, you will undergo a credit check to ensure there are no any red flags in your credit history. A Parent PLUS loan may require a cosigner if they have any adverse credit history within the last five years. Keep in mind that when endorsing a Parent PLUS loan as a cosigner, cannot be released until the loan has been repaid in full. If the Parent PLUS loan is delinquent, endorsers can be pursued in the same manner as borrower including wage garnishment.
What are the limits of the Parent PLUS loans?
Parent PLUS loans are almost limitless. You can borrow what you need, up to the cost of attendance as determined by your school, minus any other financial aid you’ve received. As stated before, you can borrow all additional expenses for college including tuition, room and board, books and supplies, as well as transportation for students at either the undergraduate or graduate level. However, just because you can do not mean you should. Too many parents borrow more than what they really need and find it difficult to repay the loans in 10 years. Only borrowing what you will need will minimize your total loan and, hopefully, keep your payments more affordable.
How to Pay Off Parent PLUS loans quickly
The standard repayment term for the Parent PLUS loans is 10 years.
Start making payments immediately. In fact, student loan lenders like Great Lakes will apply as refund payments made within 120 days of a disbursement. It’s as if you never borrowed that portion of the money at all. The interest is recalculated to accurately reflect the lower principal as well as any origination fees associated will be removed. it definitely saves you money directly lowering the principal.
Continue to make monthly payments when you child is still in school. Although your loans are in deferment while your child is attending college, you can still make payments. Any payments will help keep the cost of the loan down. Keep in mind that during deferment, the loans are still accumulating interest. Even small payments will help lower your total.
Parent PLUS Repayment Options
CHANGE YOUR REPAYMENT PLAN
You can change your repayment plan even if you do not qualify one of the more generous income-driven repayment plans switching from a standard 10-year repayment plan to a graduated or extended repayment plan.
Graduated repayment plan means the payments start low then gradually increase. The maximum repayment term is 10 years or up to 30 years for PLUS loans that have been rolled up into Direct Consolidation Loans. The drawback is that you can initially lower your payment, but will pay more interest over the life of the loan.
Extended repayment plan means the payments may be fixed or graduated. Monthly payments are lower with this plan, but you must have more than $30,000 in either Direct Loans or FFEL Program Loans to qualify. This plan will give you lower payments for up to 25 years, but you will end up paying more overall in interest.
PLUS LOAN DEFERMENT AND GRACE PERIOD
As a parent borrower, you are responsible to start making payment as soon as the loan is fully disbursed. If you cannot afford the Parent PLUS loan payment and require additional time before you can start making these payments, you can request to defer payments while your child is enrolled at least half-time and for an additional six months after your child graduates or leaves school.
Deferment can give you more time, but interest on the Parent PLUS loans will continue accruing during this time.
INCOME CONTINGENT REPAYMENT
Parent PLUS loans are not eligible for income-driven repayment plans like income-based repayment (IBR), PAYE, or REPAYE, they do qualify for the income-contingent repayment plan (ICR). An ICR can be helpful for those borrowers who are having trouble making their monthly payment which is 20% of your discretionary income. The ICR may make your monthly payments more manageable, but the tradeoff for a lower monthly payment is extending the life of the loan. This will, in turn, have you paying more in interest overall because the loan will continue to accrue interest during this time.
However, if you choose an ICR plan, you can qualify for loan forgiveness after 25 years of qualifying payments. Be aware that you are responsible to pay taxes on any amount that is forgiven. In order to qualify for ICR, you will be obligated to consolidate your loans into a Direct Consolidation loan.
REFINANCE YOUR PARENT PLUS LOANS
You can choose to consolidate your Parent PLUS loans through the Direct Consolidation Loan program. However, consolidating Parent PLUS loans with other types of federal loans only qualifies for the least generous income-driven repayment plan, ICR (Income-Driven Repayment Plan).
If you can qualify, refinancing may be the best option available. Often parents find that they can get a lower interest rate and potentially save you thousands of dollars.
Parent PLUS student loan can be high so if you have a healthy income and credit history, you may be able to borrow money at a significantly lower interest rate.