If you're trying to figure out how to pay for college next year, you may be wondering if you should take out a Parent PLUS Loan through the federal government.
While Parent PLUS Loans can be a good deal in some cases, they can also come with some serious downsides—like interest rates that are less-than-competitive. Let's talk about what you need to know.
What is a Parent PLUS Loan?
Direct Parent Loans for Undergraduate Students (otherwise known as Parent PLUS Loans) can help pay for education expenses not covered by other financial aid. These loans, offered by the U.S. Department of Education, are for parents of dependent undergraduate students.
Here are some other things you should know:
- Your child must meet the general eligibility requirements for federal student aid.
- You cannot get a Parent PLUS Loan if you have adverse credit history, although you do have the option of finding an endorser or making a case for extenuating circumstances regarding your credit history.
- The maximum loan amount is the cost of attendance (determined by each school) minus any other financial aid received.
- Your child must plan to attend a school that participates in the Direct Loan Program.
Crunching the numbers
Direct PLUS loans have fixed interest rates for the life of the loan. The most recent rate noted on the Federal Student Aid website is 7% for Direct PLUS Loans first disbursed on or after July 1, 2017, and before July 1, 2018.
As a point of comparison, some private lenders offer parent loans with much lower interest rates. For example College Ave is currently offering parent loans starting at 4.84% APR for variable interest loans and 6.62% APR for fixed interest loans.
Parent PLUS Loans also have a 4.264% loan fee. Most private lenders do not charge an origination fee.
|Parent PLUS Loan||Parent Loans through Private Lender|
|Fixed||Fixed or Variable
Depending on lender
|7.00% APR||Starting at 4.84%|
As of Oct 1, 2017
*Note: Interest rates based on preferred Nitro lender interest rates, as of May 2018. Borrowers with excellent credit usually receive lower rates.
Parent borrowers are generally required to begin payments soon after the Parent PLUS Loan is fully disbursed. Private lenders often more flexible payment terms. For example, you may be able to make flat payments or interest-only payments while your child is still in school.
Pros and cons
Parent PLUS Loans can be a helpful option if you are trying to bridge the gap between financial aid and total costs, but, as you can see, there are down sides, too.
PLUS loans come with fees, higher interest rates, and stringent requirements that must be met.
In addition, Parent PLUS Loans do not allow you the option of transferring the loans to your child down the road.
Because there are no set borrowing limits, some critics worry that some parents may take on too much debt and end up paying the loans off for many years to come.
Want to learn more about alternatives to Parent PLUS loans? See our selections for the The Best Private Student Loans of 2018.