If you didn’t save enough money for your child’s college education, you’re far from alone. But there’s a loan for that – and it’s not the kind your child pays back.
Today’s parents are taking on increasing amounts of student loan debt, borrowing funds through federal parent PLUS loans and other programs.
Consumer Affairs reported this August that parents of undergrads and non-degree students were 27 percent more likely to take out federal loans in 2017-18 than they were five years prior. At the same time, students were 23 percent less likely to take on debt, a study by Student Loan Hero noted.
While many parents are stepping up to take on debt in addition to or even rather than their kids, there’s a lot to consider.
About parent plus loans
The U.S. Department of Education offers Direct PLUS loans to eligible parents of undergraduate students for higher education costs that aren’t covered by other types of financial aid. The loans, available at colleges that participate in the federal program, have a fixed interest rate for the life of the loan, says Cindy Hermsen, director of financial aid at Oakland University.
The current interest rate for PLUS loans disbursed between July 1, 2019 and July 1, 2020 is 7.08 percent. The maximum amount parents can borrow is the total cost of attendance at your child’s school of choice – a number determined by the college – minus any other types of financial aid your student receives, Hermsen says. In addition to tuition, the cost of attendance includes things like fees, books, housing and transportation.
A variety of repayment options are available, but parents don’t need to begin making payments right away.
“When the student is in school, the parent has the option to start making payments or defer payments until the student leaves school or drops below half-time,” Hermsen explains. But keep in mind that interest will accrue during that time.
When parents do start making payments, they can choose a standard repayment with fixed monthly payments, a graduated plan based on income or an extended plan with lower payments but for a longer period of time.
How the process works
To be considered for a Direct PLUS loan, your student must first fill out the Free Application for Federal Student Aid, or FAFSA, to ensure they’re eligible for federal aid. Beyond that, the parent must be the biological or adoptive parent – or a stepparent in some cases.
“Grandparents or legal guardians are not eligible to borrow a parent PLUS loan, even if they had primary responsibility of raising the student,” Hermsen says.
Once parents decide if the loan is needed, they must request it at studentloans.gov in the “parent borrowers” section.
From there, the U.S. Department of Education sends this information to the school your child plans to attend and notifies you. “Then the parent would then have to fill out a master promissory note.”
Things to consider
A credit check is required for parent PLUS loans, Hermsen says, but parents who don’t pass it have options – including making an appeal to the U.S. Department of Education explaining an adverse credit history.
“If for some reason the parent is denied the parent PLUS loan, a student automatically becomes eligible to borrow additional federal student loans on their own,” she adds.
PLUS loans typically have a lower interest rate and more favorable repayment terms than private loans parents might hear about through their bank. Still, consider all options before taking on student loan debt.
That includes investigating any potential scholarships and grants and choosing a college that’s a good fit for the student and family. And, for the many parents who need it, a PLUS loan can bridge the gap to make higher education a reality.
“The loan is there, and the loan can make that education possible,” Hermsen says. “But it is a debt, and it will need to be repaid.”