Are Parent PLUS Loans a Good Idea?
These loans are sometimes available to parents to help their kids with their college costs, but they also have disadvantages that can make them less than ideal.
Many parents really want their kids to go to college, but nobody wants to see their loved ones saddled with huge amounts of student loan debt. The challenge is that the cost of a college education is going up at a pace that's quite a bit faster than the rate of inflation. That makes it more and more difficult for students to finance a college education without putting themselves at risk financially and having too much debt when they graduate. No parent wants to see their children end up in a no-win scenario after spending so much time and money going to college.
Because of that, many parents see it as their responsibility to help their children pay the cost of a college education. For those who don't have other financial resources, something called a Parent PLUS loan can be an attractive option. But before you simply sign up for a Parent PLUS loan, it's important to understand both the advantages and drawbacks of this type of student loan. Otherwise, you as a parent might end up putting your own financial future in jeopardy for the sake of your children.
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How Parent PLUS loans work
The U.S. Department of Education offers loans to both parents and graduate students under its Direct PLUS loan program. The general idea behind PLUS loans is that they're intended to be a supplemental source of financing once other types of federal aid have already been tapped in full.
So typically, if a student can get enough funding through grants and scholarships, as well as through federal subsidized and unsubsidized student loans, then there won't be any need to get a Direct PLUS loan, and the parents won't be eligible to do so. However, if there's still a shortfall after all those other types of aid get taken into account, then a parent would be able to get a Direct PLUS loan to help meet some of the student's financial needs.
Perhaps the most important thing to understand about parent Direct PLUS loans is that it's the parent that's on the hook to repay the loan, not the student. Even though the money typically goes directly from the lender to the student's college or university, the funding source for the Direct PLUS loan holds the parent responsible for repayment and any other requirements. Sometimes the amount of the Direct PLUS loan exceeds the tuition and fees due to the school; in that case, the parent can get any remaining money back.
Requirements for Parent PLUS loans
As the name might suggest, Parent PLUS loans are only available to parents or adoptive parents of the student in question. Grandparents and other more distant family members don't qualify. Parents must also be either U.S. citizens or have national or permanent resident status.
Parents also have to meet minimum credit standards in order to receive Parent PLUS loan funding. In particular, the following events can be problematic to your chances of being able to qualify for a Parent PLUS loan:
- Having debts that are 90 days or more delinquent that exceed $2,085.
- Having debts put in collections or charged off in the last two years with a balance that is greater than $2,085.
- Having gone through a foreclosure, repossession, tax lien, or wage garnishment at any time within the last five years.
For the most part, though, other less serious credit problems aren't as big of an obstacle in getting a Parent PLUS loan as they might be in getting either private student loans or other types of credit.
If you meet these requirements, then you can generally borrow up to the difference between the defined cost of attending the school your child chooses and any scholarships, grants, and direct loans your child receives. So if the cost of attendance, as determined by the school is $30,000, and the child qualifies for $10,000 in grants and loans, then the remaining $20,000 would be available to borrow as a Parent PLUS loan.
Pros and cons of Parent PLUS loans
The biggest benefit of Parent PLUS loans is the relatively easy process involved. Because the program runs through the Department of Education, as long as you qualify under the program's requirements, then the loan is essentially a sure thing. You're less likely to run into the more rigorous application process that you'll see with some private loans.
In addition, repayment terms for Parent PLUS loans can be more favorable than what you'll find at some private lenders. You can generally pick a standard 10-year repayment plan, or longer-term repayment plans that stretch out as long as 25 years. As a parent, you won't be able to take advantage of the same income-based repayment plans that students can use for their government-provided student loans, but you will be able to take advantage of deferments or forbearance in some cases if you run into financial trouble while getting those loans paid back.
However, the benefits of Parent PLUS loans don't come cheap. The loans have an origination fee that's currently more than 4%, which comes off the top when you first get the loan. When you spread that 4% out over a number of years, the impact it has on the interest rate isn't as big as it might seem, but it's still more than what you'll see with most other lenders.
In addition, the rates on Parent PLUS loans aren't the best in the business. Currently, the rate for loans in the 2019–2020 school year is above 7%. That's not horrible, and it is down about half a percentage point from where it was in 2018–2019. But many borrowers will be able to get a better deal from a private student lender.
Finally, it's important to understand that just like student loans that your child takes out, Parent PLUS loans aren't eligible for discharge in bankruptcy except in the rare cases in which one can establish an undue hardship from having to continue repaying the student loan. So if you run into major financial trouble at some point in the future, then you might regret having used a Parent PLUS loan rather than borrowing in another way, such as through a personal loan with your financial institution.
Be smart with Parent PLUS Loans
Finally, it’s important to keep in mind that taking on debt to meet your child’s educational costs could cause a strain on your own finances. Many parents have their own debt to handle, including mortgage loans and credit card debt. In addition, parents need to consider saving money for future needs, including retirement. If borrowing money through a Parent PLUS loan just puts you in financial trouble that could force you to turn to your child for help later in life, then you might not be doing your child any favors by taking out the loan in the first place.
Nevertheless, if you want to help your children get the college education they deserve and can afford to do so, then helping them bridge the gap between what they can afford and what their chosen college or university costs can be a huge gift. By taking advantage of the benefits of Parent PLUS loans, you might be able to help your children reach their educational dreams without getting into crippling debt before they even start out on their careers.
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