There are cases in which a financial aid offer leaves a shortfall between the proposed amount and the actual costs of attending school. The good news is students and their parents do have additional options in such instances.
Two of the most common are Parent PLUS loans from the federal government and private loans from banks, credit unions and other financial institutions. Understanding how Parent PLUS student loans work, compared to private financing, can help make deciding between the two alternatives easier.
Let’s look more closely.
Parent PLUS Loans Defined
Rather than to the student, this type of financing is offered to parents of undergraduate scholars to help their offspring cover the costs of attending an institution of higher learning. The amount of a Parent PLUS loan can be the equivalent of the full cost of attending school each year — less the amount provided by grants, scholarships, and standard student loans. Moreover, there is no upper limit, regardless of the borrower’s income level.
It’s important to recognize that these loans are made directly to parents — not the students in question. In other words, while the money must be used for a student’s education, it’s not a student loan per se. Thus, the loan is also subject to a different set of parameters when it comes to qualifying and repaying.
How They Work
Parent PLUS loans function in many ways like any other type of loan. A borrower must submit to a credit check to have an application considered. Interest rates are fixed. Origination fees are imposed upon the loan as well. Moreover, interest begins to accrue the moment funds are disbursed and continues doing so, even when the loan is in deferment.
However, like other federal student loans, income-driven repayment plans are available. The obligation is also forgiven if the student or the parent who signed for the loan perishes. Moreover, repayment can be deferred until the student graduates, or their enrollment is less than half time. Parent PLUS Loans, like other types of federal student loans, can be forgiven under the Public Service Loan Forgiveness program. They can also be consolidated without sacrificing the benefits of federal backing.
Flexible Repayment Options
Also, like other types of federal student loans, parents can choose the approach by which they repay PLUS loans.
Under the Standard Plan, the debt will be settled in 10 years, with fixed monthly payments. Graduated Plan monthly payments start small and increase over the 10-year loan term. Extended Repayment can extend remuneration of the loan over a period of 25 years. Meanwhile, the Income-Contingent option will allow payments equal to 20 percent of your discretionary income, or what you’d pay on a 12-year repayment plan — whichever figure is lower.
Forgiveness is a possibility if a balance remains after 25 years — assuming the loan was serviced according to the agreement.
Should You Go Parent PLUS or Private
The options mentioned can make Parent PLUS loans more attractive than private loans, particularly if you might need to avail yourself of consolidation, deferment or a flexible repayment arrangement.
With that said, before deciding which route to take, it’s a good idea to run some numbers through a Parent PLUS loan calculator to determine which might be the more favorable approach.
On the other hand, if you’re sure repayment won’t be an issue, you might do better with a private loan. These loans often have more competitive rates and lack origination fees. Plus, organizations like Juno can aggregate borrowers into a collective to exact more favorable terms. Repayment terms vary by lender but can be as much as 25 years to make monthly payments more affordable.
Either way, understanding how Parent PLUS loans work goes a long way toward helping you make the smartest decision.