It is common for students around the world to turn to student loans to be able to afford college their college education. Unfortunately, these loans aren’t always able to cover the total cost, and students may resort to working long hours to supplement it.
Parent PLUS loans are federal loans that provide a convenient way for parents to come to the aid of their children. They have flexible repayment options and offer a better alternative to private loans. However, defaulting on these loans can have dire consequences, including the potential for wage and tax refund garnishment.
What is a parent PLUS loan?
A parent PLUS loan is a direct PLUS loan (a federal student loan program). The loan is given to the parent or guardian of a dependent undergraduate to help cover the cost of education.
Parents can borrow up to the cost of the child’s attendance each year after all the aid is exhausted, including scholarships, grants, work-study programs and other financial assistance. There is no limit on the amount borrowed, regardless of your income amount
These loans have a fixed interest rate and the borrower pays an origination for each loan. The government does not subsidize PLUS loans. Therefore, interest will start accruing on the outstanding loan balance as soon as the funds are disbursed. Interest will also keep accruing even when the loan is in deferment.
While payment should begin as soon as the loan is disbursed, you can request deferment until your child graduates, drops out of school, or leaves.
Pros and cons of a parent PLUS loan
It has fixed interest rates.
It allows you to borrow up to the cost of attendance with no limit.
It offers flexible repayment plans, including standard, extended and graduated programs.
You can defer repayment until your child graduates from school or if your child is still enrolled in school.
There is potential for loan forgiveness.
It requires a credit check, so you may not qualify for one if you have an adverse credit history.
It has relatively high-interest rates and fees compared to all the other loans at the federal level.
Without a limit to the amount you can borrow, some people might end up borrowing more than they need, leaving them with unmanageable repayment.
PLUS, loans accrue interest even during deferment.
No guaranteed grace period, as you are required to start as soon as the loan is disbursed.
Tips to help make paying off parent PLUS loans more manageable
While you can talk to your child to help make the repayment, the responsibility remains with you, the parent. Tips to make repayment more manageable include:
Parent PLUS loan consolidation: Loan consolidation involves taking out a larger loan to pay off other debts so that you only have one loan to pay. It is an ideal option if you have multiple loans and are struggling with various payments. It allows you to roll them into one loan.
The new loan usually has more favorable terms, including a lower interest rate or monthly payments. And you can apply for it through your bank, credit union, or credit card company. You can also explore mortgage companies or lenders or use home equity lines of credit (HELOCs).
The federal government also offers consolidation options for people with multiple student loans allowing you to combine them into a direct consolidation loan through the federal direct loan program. After you consolidate parent PLUS loans, you’ll have one student loan bill and payment due each month. The new interest rate will be an average based on your loans’ original rates.
A direct consolidation Loan has repayment terms of up to 30 years. So, it allows you to extend the repayment period, which will lower your monthly payments — though you will pay more in interest overall.
The main advantage of debt consolidation is that you get a new loan with better terms. The downside is that even though the interest rate may be lower, more extended repayment periods mean you will pay more in the long run. Also, you may lose the special provisions on school loans, such as interest rate discounts and other rebates. If you default on consolidated school loans, you may have your tax refunds taken and may even have your wages attached. Most debt consolidation services charge exorbitant initial and monthly fees.
Student loan refinancing
Refinancing involves revising and replacing the terms of an existing loan. It offers an opportunity for you to get more favorable terms in terms of lower interest rates and monthly payments.
Only private lenders can provide refinancing loans, so the terms and conditions may vary. Refinancing will also mean you will no longer be eligible for federal student loan benefits. These include flexible repayment plans and extended tolerance when experiencing financial hardships.
Your credit history and score will determine the amount you qualify for, and the interest applied. In this sense, the better your credit score, the high the amount you are eligible for and the lower the interest.
Income-contingent Repayment plan (ICR)
If you want a lower monthly repayment while still under the federal direct loan program, consider applying for an ICR plan. Under this plan, your monthly payments will be based on 20% of your discretionary income. Or an income-adjusted amount based on a 12-year fixed repayment plan. You will also need to recertify your income and family size annually, which may increase or decrease your monthly payment. To be eligible for the ICR plan, you will need to first consolidate the parent PLUS loan into a direct consolidation loan, which you will pay back under the ICR plan
Public service loan forgiveness (PSLF)
You are eligible for PSLF if you work in the public sector. The PSLF program requires borrowers to work full-time at a government or nonprofit organization during repayment. You must make 120 payments on an income-driven repayment plan to complete PSLF. So, to qualify, parents must consolidate their parent PLUS loans and enroll in the ICR plan. After 120 qualifying payments toward your loan, the remaining student loan balance may be forgiven.
Are parent PLUS loans worth it?
Parent PLUS loans make sense if your child has maxed out their student aid and has no other alternative to lower the cost of their education. Thus, consider different ways to finance your child’s education before applying for one, including scholarships, grants, and federal and private student loans.
When free money options are exhausted, help your children apply for loans in their names. Not only will this make them responsible for their debt, but it will also protect your retirement. Also, federal student loans have much lower rates, and your child has more working years ahead of them. Although a parent’s first instinct is to protect their child, don’t do this at the expense of your financial future.
Frequently asked questions (FAQs)
What is the repayment period for parent PLUS loans?
Depending on your repayment plan, you have between 10 and 25 years to pay off your parent PLUS loans. However, you may extend your term up to 30 years by consolidating your loans, resulting in a lower monthly payment but more interest paid over time.
Can I transfer a parent PLUS loan to my child?
No, you cannot transfer their parent PLUS loan to their child within the federal loan system. The only way to pass the responsibility to your child is by refinancing the loan with a private lender.
Can I pay back a parent PLUS loan early?
Yes, you can pay back a parent PLUS loan early without penalties.