The Parent PLUS Loan, a lending option through the federal government for students, is one of the less understood and often forgotten funding methods for education.
What is a PLUS loan? The Parent PLUS Loan is a lending program designed differently than other federal loans to cover more expenses than Stafford or Perkins loans, up to full cost of attendance. In addition, as the name implies, a parent or legal guardian is the only person that can take out this type of loan. The maximum borrowing amount is determined by the following formula:
Amount You Can Borrow = (Total Cost of Attendance) – (Awarded Federal Need-based Aid)
Essentially, the school tells the government how much it costs to go there (with reasonable margins for books, etc.) and whatever loans or grants you receive from filing your FAFSA are deducted from that total amount. Also, it is important to note that the PLUS loan is not a need-based program, so it is subject to a credit check. A PLUS loan is similar in operation to a private student loan, but has lower fixed interest (in most, but not all cases) and more generous repayment terms.
How does it work? First, there are two potential sources of Parent PLUS loans: the Direct Loan program, and the Federal Family Education Loan Program (FFEL). The major difference between the two are interest rates, fees, and who you pay back. The condensed version of the story is FFEL usually is more expensive for the student than the same product from Direct Loan.
At this point, you’re probably wondering why anyone would want to use FFEL for loans if they end up costing more (I know I did) — the answer is it isn’t a choice. Each college decides whether or not they want to be a Direct Loan or FFEL school, and the difference is often dictated through soft benefits and relationships between the school and lenders. So unfortunately, you don’t really have a choice and must go with what the school offers. That being said, there have been a lot of studies, blogs, and commentary that point toward FFEL lenders as being more forward about educating their borrowers about the real costs of education and doing everything in their power to prevent delinquencies and defaults during repayment.
The last difference between the two programs is to whom you send your checks. Direct Loan is funded and maintained by the US Department of Education, so you are directly borrowing your money from the federal government. FFEL is actually maintained by third-party lenders such as Discover Student Loans, and your money goes to them upon repayment.
What is the benefit of a PLUS Loan? A PLUS Loan can be a valuable method of bridging the gap between federal aid and total cost of attendance. More often than not, your federal award package, based on your FAFSA application, will not be sufficient to entirely cover your school expenses.
What does one cost? FFEL has a higher fixed interest rate of 8.5% for PLUS loans, where Direct Loans are currently set at 7.9% APR. Also, FFEL typically has higher fees than Direct Loans, up to 4% of the total loan amount. Like an unsubsidized Stafford loan, interest begins to capitalize or build right after the funds are sent to your school. You have the option to begin paying it off immediately, or you can postpone for either 2 months from the last disbursement, up to 6 months after the student’s graduation.
The PLUS loan is limited in some ways, because it is restricted to being taken out by a parent or legal guardian. If you are an older student, or just don’t have a solid relationship with your family, the PLUS loan just may not be the right solution. If you still need money for your education, and this type of lending is unobtainable, check out a private student loan, which is a little less restrictive, at the cost of being more expensive in the long run.
One last thing — if you are an undergraduate student, or a parent seeking one, you do not have to file a FAFSA to qualify for a Parent PLUS Loan. It is highly recommended, but not required. However, if you are a graduate student, a FAFSA is required to qualify for a PLUS loan.
ScholarshipPoints Point Code: PLUS2010