PLUS Loan: Meaning, Pros and Cons, Repaying

What Is a PLUS Loan?

A PLUS loan, also known as a direct PLUS loan, is a federal loan for higher education available to the parents of undergraduate students, as well as graduate or professional students. PLUS stands for Parent Loan for Undergraduate Students.

Like federal student loans, PLUS loans are offered through the U.S. Department of Education's William D. Ford Federal Direct Loan Program. The government itself is the lender, hence the name "direct" loans.

How a PLUS Loan Works

For their parents to be eligible for a PLUS loan, students must be enrolled at least half-time in a school that participates in the Federal Direct Loan Program.

PLUS loan money first goes to the educational institution, which applies it to expenses including tuition, room and board, and fees. Any remaining funds are disbursed directly to the parent or to the student.

PLUS loans carry a fixed interest rate for their entire term. For example, loans disbursed on or after July 1, 2023, and before July 1, 2024, have an interest rate of 8.05%.

How to Qualify for a PLUS Loan

To apply for a PLUS loan, students and their parents must fill out the Free Application for Federal Student Aid (FAFSA). The parent must also pass a standard credit check. Students who are working toward a graduate or professional degree at an eligible school also can apply for PLUS loans on their own behalf. Such loans are often referred to as a grad PLUS loan, as opposed to a parent PLUS loan.

For a parent PLUS loan, the student must be a dependent of the parent—biological or adoptive—or, in some cases, a stepparent or grandparent. Parents and students must both meet the general eligibility requirements for student aid, such as being a U.S. citizen or permanent resident alien, and the parent must not have an adverse credit history.

If the parent has an adverse credit history, they may still qualify if they can obtain an endorser for the loan—or indicate extenuating circumstances for their poor credit score. When parents can't qualify for a PLUS loan, their children may be eligible for student loans with larger limits.

Grad PLUS loans have the same eligibility requirements, except that they apply just to the student.

Pros and Cons of PLUS Loans

Pros

• Parents can borrow the entire amount needed for the student's education: The full amount needed for an undergraduate education can be borrowed by the parent, minus any other financial aid the student receives. This includes tuition, room and board, fees, books, and other related expenses.
• Borrowers are eligible for a PLUS loan regardless of financial need: The borrower doesn't have to demonstrate financial need to receive these loans.
• PLUS loans come with relatively low, fixed interest rates: The loan's rate stays the same throughout the entire length of the loan until it's paid off in full, with no threat of higher interest charges. The rates on PLUS loans are relatively low, but not as low as those on federal student loans.

Cons

• Parents must generally pass a credit check to be eligible for a PLUS loan: Although a parent won't necessarily need excellent credit to be approved, your credit file should be fairly clean if you want to qualify.
• The government charges a loan fee: This fee is deducted from each disbursement you receive; for loans advanced on or after Oct. 1, 2020, and before Oct. 1, 2024, is 4.228%. When it comes time to pay off the loan, you must repay the entire amount you borrowed, including those fees.
• Parents are permanently responsible for repaying the loan: The loan balance can't be transferred to the child, even if the child has the means to repay it. Additionally, unlike a Sallie Mae loan, parents won't have their loan balance forgiven if their child faces total permanent disability (TPD).

Repaying PLUS Loans

Payment on a PLUS loan must generally begin once the entire loan has been disbursed. You can either start repaying your loans while the student is still in school or request a deferment. With a deferment, you won't need to make payments while the student is enrolled at least half-time or for an additional six months after the student graduates, leaves school, or drops below half-time enrollment.

Interest will continue to accrue during that time, however, and will be added to the loan's balance. The Department of Education offers several repayment plans for parent PLUS loans, including:

• Standard repayment plan: Under this plan, you make fixed monthly payments for up to 10 years. If you consolidate more than one parent Plus loan, you can extend the repayment period to up to 30 years.
• Graduated repayment plan: In this plan, you'll also pay your loan off over a period of up to 10 years. But rather than being fixed, your payments will start off low and then increase every two years.
• Extended repayment plan: This plan, which is available to borrowers who owe more than $30,000 in direct loans, allows you to pay off your loans over 25 years, by making either fixed or graduated payments.

In the case of grad PLUS loans, borrowers may have additional options, including income-driven repayment plans that base their monthly payment on their income and family size. Generally, grad PLUS borrowers have 10 to 25 years to repay their loans, depending on the repayment plan they choose.

The Bottom Line

PLUS loans are federal direct loans for the parents of college students, and these loans are also available for graduate and professional students. A PLUS loan allows you to borrow up to the full cost of college, minus any other financial aid. As with other federal student loans, PLUS loans offer a variety of flexible repayment plans. Keep in mind that interest rates on PLUS loans are relatively low, but not as low as those on federal student loans.