The Direct Loan program run by the U.S. Department of Education has two plans under it that often get confused with each other because they share the name “PLUS.”
The first is the “Parent PLUS” program. Officially, it is for loans made to parents of undergraduate students.
The second is the “Grad Plus” program. Just as officially, it is for loans made to graduates or professional students.
The only discernible difference between the programs is that parents are the borrowers in the first case and the students themselves are the borrowers in the second case.
That is important to know because in virtually every other relevant category – where to apply, eligibility, interest rate charged, loan fees, repayment plans, etc. – the two are nearly identical twins.
The money borrowed is intended to help the student pay for education expenses at college or career schooling that are not covered by any other form of financial aid.
There are plusses and minuses associated with both programs and, again, those pros and cons are nearly identical.
The plusses for both loans include fixed-interest rates; the interest is tax deductible; there are flexible repayment terms and there is no limit on borrowing.
Some would consider that last one – no limit on borrowing – a minus and for good reason. Parents or students might be overly optimistic about their ability to repay loans when they can borrow as much as they want.
Other minuses include: paying a fee for the loan; credit checks to qualify; and there are severe consequences if you default.
Parent PLUS Loan Eligibility
PLUS loans are only available to the biological or adoptive parents of undergraduate college students (that’s the Parent PLUS) or for students enrolled in graduate or professional schools (that’s the Grad PLUS).
That means legal guardians, foster parents, grandparents, aunts, uncles and other relatives aren’t eligible to apply for a loan to benefit the student.
Unlike most conventional loans, PLUS loans don’t set minimum credit scores or debt-to-income ratio for approval. Nevertheless, borrowers need to have solid credit histories. They can’t owe more than the they want to borrow unless they have someone with stronger credit willing to co-sign the loan.
Other reasons for rejection include:
- Delinquency of 90 days or more on debt of more than $2,085.
- More than $2,085 in debt that has gone into collection or was charged off during the prior two years.
- Default, discharged or debt in bankruptcy, foreclosure, tax lien, wage garnishment or a write off of a federally guaranteed student loan debt in the past five years.
Students must attend school at least half time to receive a loan. In addition, male students must be registered with Selective Service and students and parents must be U.S. citizens, permanent residents or eligible non-citizens.
Students whose parents are rejected for a PLUS loan become eligible for unsubsidized direct loans.
There are no annual or aggregate limits on the amount you can borrow under the PLUS program. You may borrow up to your full cost of attendance (as set by the college) minus any other financial aid.
PLUS loans do not count toward the aggregate limit of $138,500 for other federal loan programs. If you reach that limit with other loan programs, you can still borrow more from the PLUS loan program.
PLUS Application Process
If you meet the eligibility requirements, the next step is applying for a PLUS loan. Go online to fafsa.ed.gov to fill out an application for or contact the student’s school’s financial aid office and request a FAFSA application form.
To learn if your student’s school participates in the PLUS program, go to the federal StudentLoans.gov website and review the list of institutions in the program. If the school isn’t on the list, contact the financial aid office to find out how to request a PLUS loan.
Eligible applicants must complete and sign a Direct PLUS master promissory note, which is an agreement to adhere to the terms of the loan. Graduate and professional students who haven’t previously had a PLUS loan will be required to complete loan counseling. Again, the institution’s financial aid office should have details about procedures and requirements.
Limits apply to how much a family can borrow under the program. The maximum amount of a loan is set by subtracting all other financial assistance from the total cost of attendance.
In the 2019-2020 school year, Parents Plus loan interest rate was 7.08%. The program also sets an origination fee of 4.236%, which can be added to the loan’s principal or can be deducted from each loan dispersal.
Parents can deduct as much as $2,500 a year in interest paid on PLUS loans. This is an above the line income tax exclusion, so it doesn’t require a filer to itemize.
Once a PLUS loan is approved, the proceeds will be applied directly to tuition, fees, room and board and other academic charges. If any loan funds remain, the school will credit the parent or student the amount over expenses.
PLUS Loan Interest Rates & Fees
The cost of borrowing from Parent or Grad PLUS loan programs has held steady over the past five years, with a slight increase in the interest rate paid and slight reduction in the up-front fees associated with the loan.
|Academic Year||PLUS loans interest rate|
The interest on a PLUS loan actually dropped one-half of 1% in the school year that started in August of 2019. Paid back over the standard 10-year time frame, that is a savings of about $1,000 if the borrower left school owing the national average of $29,200.
The fees for PLUS loans are a percentage of the loan amount. They are deducted, proportionately from each loan disbursement. They dropped so slightly – .012 – that it amounts to barely a cup of coffee a week in savings.
|Academic Year||Fee for PLUS loans|
PLUS Loan Repayment
This is one of the areas where the two PLUS programs differ slightly in their timing and requirements. Make sure you understand which program your loan falls under. It could be costly if you get started late on the repayment process.
Parent PLUS Loan Repayment Options
Borrowers who are part of the Parent PLUS program are expected to begin repaying the loan as soon as the loan is fully disbursed, unless they request a deferment, which most parents do.
The deferment means you will not have to make payments while your child is enrolled at least half-time. When the child graduates, leaves school or drops below half-time, the deferment gives you a six-month grace period, after which you must begin making payments on the PLUS loan.
You should be aware that interest will accrue on the loan during the time you are not required to make payments. You can choose to pay the accrued interest or have it added to your loan principle balance when you start making payments.
Parent PLUS borrowers can choose from four repayment options.
- Standard Repayment Plan. This is a 10-year repayment plan that will have slightly higher monthly payments, but will pay off the loan in the shortest time with the least amount of interest charged.
- Graduated Repayment Plan. This plan starts with lower payments that increase every two years. It best serves borrowers who expect their income to increase steadily over time.
- Extended Repayment Plan. If you need lower payments stretched out over a longer period of time, this could be the right choice for you. Payments can be extended for up to 25 years, but you will end up paying more overall because of that.
- Income-Contingent Repayment (ICR). Payments in this program are tied to the borrower’s income, family size and amount of money borrowed. This choice is only available if you consolidate your Parent PLUS loans into the Direct Consolidation Loan program.
Grad PLUS Loan Repayment Options
The rules on Grad Plus loan repayment treat the borrower for what he/she is, namely a student who likely is just entering the workplace and needs some time to get their financial feet on the ground.
For that reason, Grad PLUS borrowers don’t have to start repayment until six months after they graduate, leave school or drop below half-time status.
They have access to all the same repayment programs as Parent PLUS borrowers – Standard, Extended, Graduate, Income Contingent and Consolidated – and a few more. Grad PLUS borrowers can use the Consolidation Loan plan to get access to Income-Based, Pay As You Earn and Revised Pay As You Earn repayment plans.
Refund of PLUS Loan
PLUS loans typically are credited to a student’s account and used to pay tuition, books, room, board, etc.
If the loan amount exceeds the various charges to the student, the remaining balance will be credited to either the student or parent.
The parent borrower needs to designate who will receive the unused balance. The remaining loans funds can be used to help pay other education-related expenses. You should designate who will receive the funds during the application process.
Parent PLUS Loan Denied?
Parent PLUS loans are easy to get if you have had a good credit history, but if there are a few bumps in your financial road, your request can be denied.
Then what? Try using one of the detours.
The easiest way out of trouble is to find someone with good credit who will co-sign the loan. It’s also the hardest thing to ask because that person has to assume responsibility for paying back the money if you stumble financially.
To include a co-signer, the applicant needs to complete the Electronic Endorsement Addendum section of the loan application. In addition, the parent must complete PLUS credit counseling and sign a PLUS master promissory note.
You also can appeal the rejection, a step that involves providing documentation of an extenuating circumstances that led to the denial. In addition to filing the appeal, the parent or parents need to complete PLUS credit counseling.
It’s possible only one parent has a bad credit rating, in which case, the other parent could apply solo for the loan.
Finally, the student whose parents were rejected can apply for a Federal Direct Unsubsidized Stafford Loan. Under that plan, the student can borrow $4,000 to $5,000 annually, and up to $26,500 in pursuit of a degree. These are the same limits available to independent students.
The student also can go back and ask the college’s financial aid office for a list of grants, scholarships, and loans for grad students available through the school. These other types of student loans are often overlooked and might end up being the least expensive way to handle a very difficult situation.