Consider the following: the average student pays $36,436 annually for college tuition, supplies, living expenses, and books. If you’re looking to help your child finance college, then a Parent PLUS loan is worth investigating.
With so many loan options to choose from, both federal and private, it’s important to understand what each loan offers. This includes repayment options, interest rates, and what should happen if you can’t repay your loan on time.
Consider this helpful guide as you navigate paying for your child’s undergraduate education so you can make the most informed decision possible.
When applying for financial aid and student loans, you may hear about Direct PLUS loans. These are part of a program for federal student loans. There are multiple types of Direct PLUS loans for parents.
One type is Parent PLUS Loans. They’re made out to a student’s parent or legal guardian, as long as the student is an undergraduate and a dependent. With these loans, you can borrow up to the amount of your child’s attendance every year. The stipulation is that you need to deduct however much financial assistance your child has already received (if they’ve received anything).
While loans without caps may seem like an ideal choice, it’s easy to accrue debt quickly with this type of loan. Keep in mind that, if you’re a grandparent of a student, you can’t utilize this loan unless you’re also the student’s guardian.
If you receive your first Direct PLUS Loan disbursement on July 1, 2023, or after this date (but before July 1, 2024) you’ll receive an interest rate of 8.05% on this federal PLUS Parent loan.
Although these loans are unlimited, you can’t borrow more than the cost of your child’s attendance while at school. You also have to deduct any other financial assistance. The cost to attend a college or university varies from school to school.
Each loan has pros and cons. Parent PLUS student loans offer more options than private loans.
A Direct PLUS loan for parents comes with more forgiveness and better repayment options, whereas private loans have stricter rules. Unfortunately, when you opt for federal PLUS loans for parents, you’ll have higher interest rates.
While private loans offer lower interest and, subsequently, lower monthly payments, if you need to defer your loans or need a more flexible repayment option, you’ll find it with a Parent loan PLUS.
Another important difference is the way a lender collects fees. Parent PLUS loans are subject to the government garnishing your wages if you default.
They can also garnish any social security benefits you receive. They may even withhold what you would get back as a tax refund.
Conversely, private student loans don’t have the same ability to garnish wages. They can send you to collections, but they can’t withhold your tax refund or take money from your paycheck or social security benefits.
Should a student or the borrower pass away, Parent PLUS loans will be forgiven. This isn’t true for private loans.
These lenders can collect money owed to them even after someone passes away. Some private lenders may have forgiveness policies in place in the event of death or disability, but not all do.
If you declare bankruptcy, you may be able to discharge a federal or private student loan. Understand that it may be difficult and it’s not guaranteed you’ll be successful.
Private student loans offer the immense advantage of lower interest rates. You may see a 2% reduction in interest rates if you have a good or excellent credit score. Over a decade or other lengthy repayment terms, a lower interest rate can wind up saving you a significant amount of money.
Federal loans, however, have fixed interest rates. These rates are determined annually and are based on the type of loan you take out.
You can’t change these interest rates unless you refinance your Parent PLUS loans or enroll in automatic payment withdrawals. Even then, the reduction may be small.
There are specific parent and student requirements when applying for Parent PLUS loans.
Parents must be the biological parent or have legally adopted the student or dependent. The student must be enrolled no less than half-time and must be an undergraduate student.
The parent or legal guardian had to be a U.S. citizen. If not, they must be an eligible non-citizen.
Parents must meet the minimum credit score requirements. The student has to meet the financial aid designated general eligibility requirement. Grandparents can only take out these loans if they adopt the undergraduate student legally.
Students must be U.S. citizens. If not, they have to be eligible non-citizens.
Students must not have any loans they’ve previously defaulted on or failed to resolve. They also can’t have consolidated an existing loan into a federal Direct loan.
For males aged 18-25 to qualify, they must register for Selective Service.
Deciding to take out a Parent PLUS loan depends on your credit score, how much you plan on borrowing, and what type of repayment options you’re most comfortable with. Although Parent PLUS loans have higher interest rates, you may be able to reduce these rates by refinancing or enrolling in automatic payments.
It’s best to speak with your child’s bursar’s office about your student loan options. They’ll provide you with the most up-to-date information for your child’s school of choice so you know what you can expect to pay upon your child’s graduation.
If you need assistance with understanding your student loan options, College Funding Professionals is here to assist you with your child’s college planning process.
We’ll help you understand the entire financial aid process so you’re prepared as you apply for federal or private loans, so reach out to us today with any questions you may have about the college application process.