If you have children, you are probably aware that college is expensive. Even if you started saving early, the nest egg you have built up may not be enough to cover the rising costs of a college education. For the 2016-2017 school year, the average cost of tuition and fees was $33,480 for a private school, $9,650 for in-state tuition at a public college and $24,930 for out-of-state residents attending a public college. And of course, room and board are added on top of these high tuition costs, leaving many students and their parents wondering how exactly they will cover all these expenses.
The answer for most Americans comes in the form of scholarships, grants, work study programs, and student loans. Most college graduates have some level of student loan debt, and an increasing number of parents are taking out loans to help their kids pay for college as well. One type of federal loan that many parents may consider is offered through the federal government: the Parent PLUS loan.
What is a Parent PLUS Loan?
Parent PLUS loans are offered by the United States Department of Education to parents of dependent undergraduate students enrolled at least half-time at an eligible college or career school. Parent PLUS loans are available to both biological and adoptive parents, and in some cases, to stepparents.
To be eligible for a Parent PLUS loan, you must meet certain eligibility requirements. Unlike federal student loans taken out by the student (your child), Parent PLUS loans require a credit check. If you have an adverse credit history, you will probably not qualify for a Parent PLUS loan. For the purposes of these loans, an adverse credit history includes having one or more debts with an outstanding balance greater than $2,085 that are 90 or more days delinquent, or that have been placed in collection or written off within the past two years. You will also be considered to have an adverse credit history if you have had a bankruptcy, foreclosure, repossession, tax lien, wage garnishment, write-off of a federal student loan debt, or default determination in the past five years. However, even if you have an adverse credit history, you could still qualify for a Parent PLUS loan if you have an endorser who agrees to repay the loan if you do not repay it. The endorser must not have an adverse credit history, and cannot be the student on whose behalf you are borrowing the money. You can also still qualify for the loan if you can demonstrate that there are extenuating circumstances relating to your adverse credit history.
The other eligibility criteria for Parent PLUS loans include having financial need, being a U.S. citizen or permanent resident and that your child is enrolled at least half-time in an approved program. You can apply for a Parent PLUS loan directly through the Department of Education’s website through your child’s Free Application for Federal Student Aid (FASFA) form.
Interest rates for Parent PLUS loans are currently 7% for loans disbursed before July 1, 2017. The interest rates on Parent PLUS loans, like all federal loans issued after 2006, are fixed for the life of the loan. Parent PLUS loans also have fees based on a percentage of the loan amount and deducted from each loan disbursement.
There are a number of repayment plans available for Parent PLUS loans, including standard repayment plans with terms ranging from 10 to 25 years. They are not eligible for income-driven or income-based repayment plans, unlike other federal student loans.
Parent PLUS loans tend to be significantly more expensive than other types of federal student loans and around equal to private student loans. The current interest rate for a Parent PLUS loan is 7%, while direct subsidized and unsubsidized undergraduate student loans have an interest rate of 4.45%. Parent PLUS loans also charge a much higher loan fee of 4.276% for loans disbursed after October 1, 2016 and before October 1, 2017, compared to 1.068% for direct subsidized loans for the same time period. In addition, Parent PLUS loans are not available for student loan forgiveness programs. Parent PLUS loans are discharged only in rare circumstances, such as if the school was closed before your child completed the program or if the loan was falsely certified through identity theft.
Parent PLUS Loan Repayment
With a Parent PLUS loan, you will have the choice between three repayment plans: a standard repayment plan, a graduated repayment plan and an extended repayment plan. Parents who take out Parent PLUS loans are not eligible for income-based or loan forgiveness programs.
With a standard repayment plan, borrowers make fixed payments for 10 years, with the possibility of extending payments to 30 years through loan consolidation. With a graduated repayment plan, the time period for repayment is the same as with a standard plan, but the payments are lower at first, and then increase, typically every 2 years. If you choose an extended repayment plan, your payments will be made over a 25 year period on either a fixed or graduated basis.
Can You Refinance Parent PLUS Loans?
Parent PLUS loans tend to have significantly higher interest rates than other federal student loans, and may even have higher interest rates than many private student loans. That may make refinancing an attractive option.
Refinancing is a process where you take out a new loan to pay off an old loan or loans. With a Parent PLUS loan, you can obtain a more favorable interest rate based on your credit score, history of making on-time payments, income, and other factors. If you choose to refinance your Parent PLUS loan, you can do so in your own name or your child can refinance the loan in their own name. This has the effect of transferring the loan to your child — something that cannot be done through the government — and giving them the responsibility of paying off the loan.
To be eligible for refinancing, you will need a credit score of at least 660, a solid credit history, and a steady income. The benefit of refinancing is that you will typically get a far lower interest rate, which can translate into thousands of dollars in savings over the life of the loan.
Is There Parent PLUS Loan Deferment?
If you are having trouble making payments on your Parent PLUS loan, you may be eligible to have your loan deferred for a period of time. This will allow you to stop making payments while the loan is in deferment. However, interest will continue to accrue on your Parent PLUS loans while they are deferred, and you will ultimately be responsible for paying this interest (either during deferment or at the end of the deferment period). You can request deferment by contacting your loan servicer.
Are There Private Student Loan Options for Parents?
If you would prefer to avoid taking out a Parent PLUS loan, there are other options for securing funding for your child to attend college. Parents can take out private student loans to help their children attend college. These parent student loans may be an attractive option for many, particularly parents with a good credit score who may be able to take advantage of a lower interest rate than what is offered by the Department of Education. However, parents should carefully review the terms and conditions of each loan. Many of these loans may not have deferment or forbearance options, which may leave you in a bind if you are unable to make your monthly payments due to unforeseen circumstances.
One lender that offers parent student loans is SoFi, which provides student loans at rates that are competitive with Parent Plus loans. SoFi’s loans have 5 to 10 year terms, and are not based on a credit score. Instead, SoFi bases its application process on the borrowers’ employment history, past ability to make payments, and monthly income relative to expenses. Payments on SoFi loans are due within 30 to 45 days after the loan is funded.
Another option for parent student loans is College Ave, which also offers loans at competitive rates. College Ave does not charge origination fees, and its loan terms range from 5 to 12 years. This lender requires borrowers to earn at least $70,000 per year to qualify and have a credit score in the mid-700s. Unlike SoFi, College Ave gives borrowers the option to start making full monthly payments immediately, pay just interest, or pay interest plus any amount you can afford.