Many parents want to help fund their child’s college education. One common way to do this is through the Federal Parent PLUS Loan. Like with other student loans, the Parent PLUS Loan offers advantages to private student loans, including safer repayment terms and the option to enroll in repayment programs. As the name suggests, this loan goes to the parent(s) of a dependent college student and limits how much debt the student will have to take on. But, parents with bad credit may not qualify. Parents should be aware of Parent PLUS Loan eligibility requirements, because a denial can impact their child’s ability to finish college and can create more debt for the child. Parents and students also need to evaluate the cost of higher education carefully, because PLUS Loan amounts can be dangerously high at some schools.
Parent PLUS Loan Rates and Terms
Since 2006, Parent PLUS loan interest rates have been fixed at 7.9%. This is set to change, however, after the recent Senate bill. For the 2013-2014 school year, Parent PLUS loans will be offered at a rate of 6.4%. Then, they will be tied to the rate of the ten-year Treasury note, with a cap of 10.5%.
The PLUS loan is given for one academic year at a time. As a result, parents must qualify for the loan each year. In other words, the credit check at year one does not make parents eligible for four year’s worth of Parent PLUS Loans. The loan enters repayment once it is fully disbursed, and there are a variety of repayment options available to parents, including deferment.
Problem #1: Strict Parent PLUS Loan Eligibility Requirements
Parent PLUS loan eligibility requirements are strict, and students may be forced to seek private loans when their parents are denied.
To meet Parent PLUS loan eligibility requirements, a borrower must be the parent of a dependent undergraduate student who is enrolled at least half-time at a qualifying school, and the borrower must pass a credit check without being deemed to have “adverse credit.” Read here for the full definition of adverse credit along with more information about Parent PLUS Loan eligibility.
What happens when a parent is not eligible for a PLUS Loan and gets denied?
When a parent is denied for a PLUS loan, the dependent child is given extra unsubsidized Stafford Loans. The student can be given as much as an independent student at the same grade level. Independent students in their third or fourth year are eligible to receive up to $12,500 in Stafford loans, with a limit of $5,500 on subsidized loans.
So, a third year student would be eligible for up to $7,000 in unsubsidized Stafford loans if his or her parent was denied a PLUS loan. Keep in mind, the student may have used some of this $7,000 allotment already, if unsubsidized Stafford loans were part of the financial aid package offered by the school. According to the Federal Student Aid website, the student should contact his or her school to begin the process of securing more Stafford Loans.
But what if the extra $6,000 is not enough to cover the rest of the cost? Then, the student or parent will have to seek private student loans. Since we already know that the parent has adverse credit, there is a strong likelihood that the student will end up with what we call bad credit student loans.
So now, let’s look at how much more this family will have to pay because of the adverse credit.
Let’s assume the student would need $12,000 to meet the full cost of college. Here’s how much the family would owe if they qualified for a $12,000 Parent PLUS Loan vs. how much the student will owe if he or she takes $6,000 of extra Stafford Loans and $6,000 in a private student loan at 10% interest.
|Two Parent PLUS Loan Scenarios|
The Parent qualifies for $12,000 in PLUS Loans.
The Parent is denied a PLUS Loan. The student takes out $6,000 in extra Stafford Loans along with $6,000 in private loans at 10% interest.
|Scenario||Total Loan Amount (4 years)||Total Interest Paid over Life of Loan|
Problem #2: Parent PLUS Loans Have No Limit
So far, we have discussed the problems surrounding Parent PLUS Loan denials. But, there is actually a big problem facing parents who qualify for the loan:
The Parent PLUS Loan has no limit.
This loan is designed to cover the difference between the total cost of attendance and the amount of aid that has been awarded to the student. If the student has chosen to go to an expensive school that offers very little financial aid, the Parent PLUS Loan will be for a larger amount, burdening the parents with more debt.
Essentially, this is a matter of financial literacy—Are parents and students evaluating colleges based on finances?
Students and parents should carefully review financial aid offers from different schools. They should consider grant amounts (grants don’t have to be repaid) and look for low-interest rate loans in their package. Any remaining amount, which can be covered by the PLUS loan, should be considered carefully. Students and parents should want this amount to be as low as possible. Why? Because this amount will be covered by either a PLUS loan (the federal student loan with the highest interest rate) or private loans with more dangerous terms.
Let’s take a closer look. Here, we assume a student is considering two public schools, one is in-state and one is out-of-state. The out-of-state school will require that the parents take out a larger PLUS Loan:
|Public In-State||Public Out-of-State|
|PLUS Loan Amount Needed (each year)||$6,000||$12,000|
|Total PLUS Loan Repayment Amount||$32,556||$65,111|
As you can see, the parents and student could have saved a substantial amount of money by choosing the in-state school. This comes down to doing proper research into colleges and their financial aid packages. It also serves as a good reminder that students and parents should look at going to college as a financial decision.
Parent PLUS Loans: A Quick Review
We have shown two of the major problems with Parent PLUS Loans, and really it’s a Catch 22. When parents don’t meet Parent PLUS Loan eligibility requirements and are denied, their children suffer by taking on more debt, usually with bad terms.
Parents who do meet Parent PLUS Loan eligibility need to be very careful about taking on too much debt. While the PLUS loan has no limit, parents should not abuse this “perk.”
Luckily, if parents are struggling to pay back PLUS Loans, a student loan counselor can help explain their repayment options. Sign up for student loan counseling today for more assistance.