What Is A Parent Plus Loan?
Already anxious about sending your kid off to college? Here’s a loan for you to bear the expense!
Higher education is more expensive than you think; people use their entire life’s savings to fund the education of their child. And there are some people who don’t have that kind of money; not as earnings and definitely not as their savings.
Statistics show that 56% of students can’t even afford going to college, and they have to ask for student loans and other means of funding.
Parent Plus Loan Definition
A parent plus loan is granted to the parent by the federal government, these are used to fund the education of undergraduate students. PLUS is short for Parent Loans for Undergraduate Students, and are also referred to as direct plus loans.
Parent plus loans allow you to borrow the full cost of the education, after subtracting any other sources of financial aid too. But the full amount can also be borrowed if there are no other financial aid sources, like a financial gift deed, sponsorship or even a generous friend willing to help.
The repayment plan often starts as soon as the student is enrolled at the university, and no matter if they dropped out during the degree or whatever the case, the loan has to be paid according to the repayment schedule decided at the time.
How does Parent Plus Loan work?
Parent PLUS loans have a fixed interest rate, and the borrower pays a basic fee at the start of the loan, called an origination fee. Parent PLUS loans are not subsidized, so interest begins to stem on the outstanding loan balance as soon as funds are disbursed and continues to rise even if the loan is in postponement.
The process starts by applying and filling out the FAFSA (Free Application for Federal Student Aid) and then downloading a promissory note from the school financial aid website. The note needs to be carefully read and you will find all details there. The approved loan could be the full cost or minus the amount from other sources of financial aid.
It all depends on how much you really want the funds to cover, you can ask for a full payment or partial if you have other solid means of paying for the child.
Parent Plus Loan Eligibility
The eligibility criteria to receive a parent plus loan is fairly simple; the institution of education should be recognized by the Federal government and The US Department of Education. You’re eligible for the loan if:
- You are the biological or adoptive parent (or in some cases, the stepparent) of a dependent undergraduate student enrolled at least half-time at an eligible school
- You don’t have an adverse credit history
- You meet the general eligibility criteria of the Federal Student Aid
Unless grandparents have legally adopted the child, they CANNOT receive the parent plus loan, even if they spent their lives raising the child. This is just one criteria part where most grandparents may not be eligible for a parent plus loan.
Parent Plus Loan Interest Rate
The interest rate for parent plus loans for the academic year of 2020-2021 is 5.30%. This has come down from a sharp 7.08% since last year due to the coronavirus pandemic. This interest rate is always fixed for the entire term of the loan, so you don’t have to worry about it spiking up as each year passes by.
The procedure of accepting the loan is simple: the money first goes to the university the student is enrolled in, and they cut tuition, accommodation and other fees from the fund. Any remaining amount is given to the parent or student to use during their time at the institution.
The current interest rate for a parent plus loan is at 5.30% which is to remain fixed throughout the life of the loan. This is applicable to all loans granted from July 1, 2020 and before July 1, 2021.
The amount you can borrow is the cost of attendance of the course of the degree minus any other means of financial assistance you may have.
Parent Plus Loan Calculator
A parent plus loan calculator tells you how much money you should borrow, and according to the interest rate how many monthly payments you will have to make. The calculator enters all relevant data like the interest rate, loan amount, origination fee, number of years etc. and then runs through the algorithm to display a close to accurate amount of what you should be expecting.
Running the numbers at your own end is helpful because it generally gives you an idea of what you need to expect when it comes to parent plus loans. If you’re able to afford the monthly payments against your income, then it is probably best. But if not, you could look for ways of reducing the income by borrowing less loan id you have another source of aid like a financial gift deed etc.
Parent Plus Loan Repayment
There are several repayment options for people with a parent plus loan; and here are those plans.
Standard Repayment
Standard reimbursement includes level amortization for a 10-year reimbursement term. This implies that regularly scheduled installments are the same for each of the 10 years.
Standard repayment is the reimbursement plan with the highest monthly payment. But, it also involves the lowest total payments over the life of the loan, saving you money.
You will likewise be finished repaying your Parent PLUS advances in 10 years. For the most part, you should intend to have all obligations paid off when you resign. On the off chance that your absolute Parent PLUS credits for every one of your kids are not exactly your yearly pay, you should have the option to stand to reimburse the advances in 10 years or less.
Graduated Repayment
Under the graduated repayment plan, your regularly scheduled installments start off lower, scarcely above interest-only payments, and will increase every two years. No payment will be more than three times any other payment.
The reimbursement term under graduated repayment relies upon the credit equilibrium and if the advances are merged. The reimbursement terms incorporate 10 years, 12 years, 15 years, 20 years, 25 years and 30 years, like the reimbursement terms for broadened reimbursement.
Extended Repayment
Extended repayment, like standard repayment, involves level amortization, but with a longer repayment term. There are two types of extended repayment.
If the borrower has consolidated their federal loans, the repayment term depends on the loan balance according to this table.
| 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 |
Note: Sample data has been extracted online, courtesy of SavingForCollege.
If the borrower has not consolidated their federal loans, they are eligible for a 25-year repayment term if the total loan balance is $30,000 or more.
The monthly loan payments will be lower under extended repayment than under standard repayment, but the total interest paid will be greater.
What happens if you don’t pay Parent Plus Loan?
Financial constraints can fall upon anyone at any given time. And with a hefty loan to pay back, there is added pressure too. What if you’re in a major financial fix and are unable to pay back the parent plus loan?
Well, here is what’s going to happen:
- After 90 days of missed loan payments, your loan will be reported as delinquent to the credit bureaus
- After 180 days of missed loan payments, your credit report will be updated to show the lengthy nonpayment history
- After 270 days of missed loan payments, your loan will default.
As harsh as the process sounds, if you think your financial constraint is temporary and you will be up and about in 2-3 months, you can apply for loan forbearance which will give you a break from paying the money for a couple of months.
The real issue starts when the loan payment hits default!
This means along with the loan that will increase drastically, you will have to face administrative wage garnishment, social security benefit payment offset and a tax refund offset. All of these will unknowingly invite so many consequences for you.
If your loan hits default, there is still a chance for you to bring it back by entering into loan rehabilitation. This is a process where you agree to pay 9-monthly payments in a repayment program. After you’re done paying for the 9th month, you will be pulled out of default and transferred to a new loan servicer. You can then customize another payment plan that suits you, and then make sure you stick with it too.
Are Parent Plus Loans a good idea?
Well, if we’re being completely honest, a parent plus loan has its own share of risks and benefits. And it all kind of also depends on how badly a family needs financing for their child. A lot of times when the children have graduated and years have passed, parents’ careers are also ending and they’re reaching the retirement stage. In such cases it gets really hard for some parents to keep paying the loans they took.
One way of avoiding this situation is transferring that loan on to their children if they’re no longer dependent. If the children have graduated and have landed stable jobs or businesses, it is a good idea to have them pay for the loan.
One major disadvantage of the parent plus loan is the high rate of interest. In 2020, it is 5.30% as mentioned above, and even though it is fixed, the amount is accumulated and becomes a very big sum, often very hard to pay back.
Moreover, as soon as the loan is granted, the repayment process starts without any leverage of a grace period. With other student loans, there is an option for the student to start paying back after 6 months or 1 year into the degree.
It is naturally a better idea to apply for a student loan instead because they might be eligible for student loan forgiveness plans and the child may get out of paying the loan- legally. A parent plus plan is an added burden on parents and while it is important to get your child through college, it is also important to think of the long-term risks associated with paying back certain loans.
Who is responsible for a Parent PLUS Loan?
Parent PLUS loans are borrowed by parents to fund the education of their children, and of course, since parents borrow the loans, only they’re responsible for paying them back on time.
Only the parent borrower is required to pay back a Parent PLUS Loan, as only the parent signed the master promissory note for the Parent PLUS Loan. The student is not responsible for repaying a Parent PLUS Loan.
And this also means that parents are not allowed to transfer their loans to their children or the student later. It is clearly mentioned in the rules that parents should not borrow these loans with the intention of transferring them to their children later in life.
Conclusion
A parent plus loan is an excellent way to help your child through college if you don’t have enough savings, but like every other loan, this one also comes with a fixed rate of interest that is to be paid for a specific amount of years.
College education has become super necessary for students these days and it is often not possible without an external source of aid. The government has given open access for people to apply for student loans and parent plus loans in order to pay for their education; but the interest rate of 5.30% makes it very hard for people to pay it back.
If a person is unable to pay their parent plus loan back in time, then the government can seize their wages and take their tax refunds and Social Security checks, among other consequences. Defaulted loans also aren’t eligible for different repayment plans, or deferment or forbearance. This generally takes a hit on the person’s credit rating too, making it hard for people to often bounce back from financial setbacks.
