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Blog » Annuities » Parent PLUS Loans Demystified: How to Fund Your Child’s Education

Parent PLUS Loans Demystified: How to Fund Your Child’s Education

Updated on March 16th, 2024
Parent PLUS Loans Demystified

Securing funds for your child’s college education can often be bewildering, riddled with jargon and complexities. Parent PLUS Loans emerge as a potential lifesaver among the array of options. However, before signing up for this commitment, it’s imperative to understand the intricate details of Parent PLUS Loans.

They encompass eligibility requirements, the application procedure, repayment plans, and inherent pros and cons. This guide walks you through everything involved. Read on!

The Much-Needed Extension

Before we delve deeper into the details of the Parent PLUS loans, here’s some crucial information to consider:

There’s good news for federal student loan borrowers! On November 22, 2022, an eighth extension on the pause for federal student loan payments and interest accumulation was announced – thanks to the discernment of the Biden administration.

This means you won’t have to make payments for now, and your loans won’t accumulate interest. The freeze lasts until the legal challenges to the student loan forgiveness program are settled. If unresolved by the end of June 2023, expect payments to resume two months later.

At this juncture, Parent PLUS Loans have become even more relevant. You can take them out to cover your child’s college attendance cost. However, are they the right choice for your family’s needs? Let’s take a closer look.

A Brief Introduction to Parent Plus Loans

PLUS Loans are unsubsidized loans for parents with dependent undergraduate students. If you can’t get a PLUS loan, you may qualify for additional unsubsidized loans. Here’s what you need to get a Parent Plus Loan.

  • You need to be the biological or adoptive parent. Sometimes, stepparents can also apply.
  • The program is dedicated to parents of undergrad students enrolled at least half-time in an eligible school.
  • You shouldn’t have a bad credit history. If you do, there are additional requirements to meet. For instance, you may need an endorser with excellent credit history. If you can’t, the individual will have to agree to repay the loan.  Alternatively, you may need to produce convincing documents to justify the factors that contributed to your adverse credit history.
  • You must meet the basic eligibility requirements for federal student aid. As such, you need to be a U.S. citizen, have a valid Social Security number, be enrolled or accepted for enrollment as a regular student in an eligible degree or certificate program, maintain satisfactory academic performance in college, etc.

A crucial point to remember: Even if grandparents or legal guardians have primarily raised a student, they can’t get parent PLUS loans. This applies unless they have legally adopted the student. They are ineligible to receive these loans.

The Current Interest Rate for Parent Plus loans

For the academic year that commenced on July 1, 2022, and will conclude on June 30, 2023, the Direct PLUS Loans carry a fixed interest rate of 7.54%. This means the rate stays the same throughout the life of your loan.

This rate is considerably higher than the 4.99% rate offered on Direct Loans extended to undergraduates for the same period. All federal student loans entail a one-time origination fee deducted from your loan funds.

However, for Parent PLUS loans taken out in the academic years after October 1, 2020, the loan origination fee is 4.228% of the borrowed amount.

Regarding how much you can borrow, the PLUS loan program calculates this based on your child’s school costs. Your child’s school will determine the total attendance cost, including tuition, housing, books, and other necessary expenses.

However, any other financial aid your child receives will be considered. You’ll need to subtract those aids from the total cost of attendance. The remaining balance is the maximum amount you can borrow under the Direct PLUS Loan program. This process ensures that your loan covers your child’s education costs without exceeding the actual cost of attendance.

Repayment Plans for Plus Loans

Your Parent PLUS Loans qualify for various repayment plans, each with unique features. The key is to choose the one that best suits your financial needs. The available alternatives include the following.

Standard Repayment

The Standard Repayment plan requires you to pay a fixed amount for 10 years. This option demands the highest monthly payment but is the most economical in the long run, minimizing your overall loan cost. Ideally, you should have all your debts cleared before retirement.

If your total Parent PLUS loans for all your children are less than your annual income, you can likely afford to repay the loans in a decade or less.

For instance, your annual income is $75,000, and your children’s total Parent PLUS loans are $60,000.  At an interest rate of 7.54%, your fixed monthly payments would be approximately $705.

Therefore, with these monthly payments, you’re on track to clear your $60,000 loan within 10 years, potentially before you retire.

Extended Repayment

Extended Repayment, like the standard one, is a level of amortization but over a longer term. Here’s how it works.

Loan Balance Repayment Term
Less than $7,500 10 years
$7,500 to $9,999 12 years
$10,000 to $19,999 15 years
$20,000 to $39,999 20 years
$40,000 to $59,999 25 years
$60,000 or more 30 years

If you haven’t consolidated your federal loans, you’re eligible for a 25-year term if your total loan balance is $30,000 or more. Note that while the monthly payments are lower than Standard Repayment, the total interest is higher.

Graduated Repayment

Assume you have a Parent PLUS loan of $60,000 at an interest rate of 7.54%. Under the Graduated Repayment plan, your initial payments start low, covering just a bit more than the interest accruing. That’s approximately $375 per month initially.

The unique aspect of the Graduated Repayment plan is that your payments will increase every two years. However, no single payment will ever be more than three times the amount of your lowest payment.

Therefore, in the provided example, your payments would start at $375 per month, and they will gradually increase up to $1,125 per month over the years (which is three times the initial amount of $375).

The repayment period varies depending on your loan balance and whether you’ve consolidated your loans. You have options ranging from 10 to 30 years, similar to extended repayment.

This plan allows you to start with lower, more manageable payments. They gradually increase over time, typically aligning with expected career progression and income increases.

However, remember, while this plan reduces your initial payment burden, you’ll end up paying more interest over the loan life compared to the Standard Repayment plan. This occurs as the principal balance decreases more slowly due to the lower initial payments.

[Related: Why New Graduates Should Think About Retirement Now]

Income Contingent Repayment (ICR)

You can opt for ICR if your Parent PLUS loan is part of a Federal Direct Consolidation Loan and entered repayment on or after July 1, 2006. Under ICR, your monthly payment is based on your income, not the amount you owe. You’ll pay 20% of your discretionary income, defined as your income above the poverty line. The following example may help you decipher this better –

Let’s assume you earn $75,000 annually and have a Parent PLUS loan of $60,000. The federal poverty line for a family of four in the contiguous 48 states as of 2023 is $28,980. Under ICR, your discretionary income is the difference between your income and 100% of the poverty guideline for your family size. In this case, it would be $75,000 – $28,980 = $46,020.

As the ICR plan sets your monthly payment at 20% of your discretionary income divided by 12,  your monthly payments would be approximately $767.

However, any remaining balance on your loan is forgiven after 25 years of consistent payment. So, if you keep making these monthly payments and there’s still some amount left on your loan after 25 years, that remaining amount is forgiven.

Public Student Loan Forgiveness (PSLF)

Public Service Loan Forgiveness (PSLF) is a program you can leverage if you’re working full-time in a particular public service job. To become eligible for this program, you need to make 120 loan payments, which usually takes about 10 years.

These payments must be made while participating in an income-driven repayment plan or the standard 10-year repayment plan of the Direct Loan program.

Suppose you have a Parent PLUS loan of $60,000 at an interest rate of 7.54% and an annual income of $75,000. You also work full-time in a qualifying public service job. You opt for the Income-Contingent Repayment (ICR) plan. As calculated earlier, your monthly payments under ICR would be about $767.

You’re now eligible for the Public Service Loan Forgiveness (PSLF) program. This means, after making 120 payments while working full-time in public service, any remaining loan balance will be forgiven.

Note: To qualify for PSLF, parent borrowers must first consolidate their Parent PLUS loans into a Federal Direct Consolidation Loan. Besides, submitting the Employment Certification form each year and whenever you switch jobs is essential to ensure your eligibility for PSLF.

Also, note that standard repayment yields no forgiveness, as the loans are fully paid after 10 years. PSLF reduces the forgiveness period to 10 years and is tax-free.

Refinancing your Loan

You may consider refinancing your Parent PLUS loans into a private loan. This could be a good option if you have excellent credit, as you might qualify for a lower interest rate. However, remember you’ll lose federal repayment options and other benefits since your loan will no longer be federal.

Alternatively, your child can choose to refinance the loan in their name through a private lender.

However, to qualify for this private refinance, they need a robust credit score, sufficient income to make the necessary payments and a solid track record of on-time loan payments. While this decision may suit some borrowers, it doesn’t always guarantee savings.

Also, remember that transferring federal student loans comes with the loss of many benefits, including access to federal forgiveness programs, generous deferment options, and more.

How To Apply?

The process of securing Parent PLUS Loans involves the following steps.

  • First, you’ll have to complete the parent’s section of the Free Application for Federal Student Aid (FAFSA), providing detailed information about your household and financial situation.
  • Once your FAFSA has been processed, you’ll get a report detailing your federal student aid options. Your child’s college will send a comprehensive financial aid offer as well. It’s important to review these offers carefully. Doing so will allow you to strategize how to use the aid, reduce out-of-pocket expenses, and borrow as much as possible.
  • You can complete the application online or through your child’s school’s financial aid office. At the end of this process, you must sign a Master Promissory Note detailing your Parent PLUS Loan’s terms.
  • After this, the loan funds will be released to your child’s school. These funds will then cover outstanding costs such as room, board, tuition, and fees.

Final Thoughts

Parent PLUS Loans can provide a lifeline for families seeking additional financing for college expenses, but they come with substantial responsibilities and higher costs than other federal student loans. Always explore all other financial aid options like scholarships, grants, and work-study programs.

If you decide a Parent PLUS Loan is the best fit, understand the loan terms, repayment options, and how it fits into your overall financial picture. After all, every dollar you borrow today is one less you’ll have available for other financial goals in the future.

Frequently Asked Questions

What is the limit of Parent PLUS loans?

A remarkable feature of Parent PLUS Loans is the high borrowing limit. You can borrow up to the full cost of your child’s education each school year, minus any other student aid. The cost of attendance, set by your child’s school, encompasses all education-related expenses.

What are the credit requirements for Parent Plus loans?

The Department of Education maintains stringent credit requirements for Parent PLUS loan applicants. You must have a relatively clean credit history in the past five years, free of defaults, bankruptcy discharge, repossessions, foreclosures, charge-offs or write-offs of federal student aid, wage garnishments, and tax liens. Furthermore, your credit report should not show any 90-day delinquencies, charge-offs, or collections on accounts with balances exceeding $2,085.

Are PLUS loans deferrable?

With Parent Plus loans, you’re eligible for a deferment if you’re the parent who received a Direct PLUS Loan for funding your child’s education. Besides, you’ll have to ensure that your child is studying half-time or more at an approved college or career school.

What student credit options do I have to pay-off my college fees?

You have access to several credit alternatives to pay off your college fees. For instance, you can consider Federal Stafford Loans.  They come in both subsidized and unsubsidized forms, based on your financial need. In addition, you can count on private loans from banks or credit unions. However, they often require a credit check or a co-signer.

What side hustles can I consider to pay off my student loan faster?

You can take up different part-time jobs or freelancing to pay off you student loans faster. Options may include tutoring, retail or food service jobs, and remote gigs like graphic design or programming. You can also consider app-based jobs like rideshare driving or food delivery.

Featured Image Credit: nirat, Pexels; Thank You!

Deanna Ritchie

Deanna Ritchie

Deanna Ritchie is a managing editor at Due. She has a degree in English Literature. She has written 2000+ articles on getting out of debt and mastering your finances. She has edited over 60,000 articles in her life. She has a passion for helping writers inspire others through their words. Deanna has also been an editor at Entrepreneur Magazine and ReadWrite.

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