Parent PLUS Loans: You might be eligible, but should you take one?
In a list of life’s certainties, death and taxes come to mind. But here’s a third: Spiraling costs to educate a child. If you’re like many parents, after you get that financial aid letter—including any scholarships, loan offers, and such—you’ll likely still have a gap to fill in order to pay all the costs of college.
This is where a parent PLUS loan might seem attractive. With a Direct PLUS Loan, you can borrow to help your child pay for college.
But is a parent PLUS loan the right move for you and your finances? Let’s take a look at how the Direct PLUS Loan works—and why you might want to think twice before moving forward.
Key Points
- Parent PLUS loans often have higher interest rates than other student loans.
- Before taking on debt for your child’s education, consider your retirement and other long-term goals.
- Other options, such as community college and incentivized loan forgiveness programs, may work better for your long-term outlook.
What is a parent PLUS loan?
When you fill out the Free Application for Federal Student Aid (FAFSA), you and your student might discover there isn’t quite enough student aid available to completely cover the cost of attendance at college. The Direct PLUS Loan gives you a chance to help out.
With a parent PLUS loan, you (not your child) receive a loan from the government to help pay for their school. You can borrow up to the school’s cost of attendance, minus any other financial aid your child receives. So if federal grants, loans, and other financial aid aren’t enough to take care of the costs of college, the rest can be covered by you—in the form of debt.
How to apply for a parent PLUS loan
Parents can apply online for a Direct PLUS Loan from the Department of Education. In order to qualify, you must meet the following conditions:
- Be the parent (biological, adoptive, or step) of a dependent undergraduate student attending school at least half-time.
- Not have an adverse credit history (as described by the Department of Education).
- Be able to meet the general requirements for student aid, which are determined when your child fills out the FAFSA.
If you qualify, you can use the Direct PLUS Loan online application and submit it to the school. It’s important to note that parent PLUS loan funds are your debt. You’re responsible for repaying the loan, not your child.
Pros and cons of parent PLUS loans
| Pros | Cons |
|---|---|
| Easier credit requirements than private loans. | The interest rate for PLUS loans is higher than for other federal loans, and interest begins to accrue immediately upon disbursement of funds. |
| Preset interest rate, regardless of credit score. | The debt is yours, and you—not your child—are responsible for repaying it. |
| Possible deferment of payments while your child is in school, if your application is accepted. | PLUS loan payments can reduce your ability to save for retirement, get additional loans, or reach other financial goals. |
Should you get a Direct PLUS Loan?
It can be difficult to decide whether to get a parent PLUS loan to help your child pay for college. Consider the situation carefully and be realistic about how taking on a parent PLUS loan might affect your ability to achieve other financial goals.
Although it can be easier to get a parent PLUS loan than a private student loan, it might also come with a higher interest rate. If student loans are enough to bridge the college funding gap without a PLUS loan, it might make more sense to have your student do the borrowing.
It’s harder to obtain student loan forgiveness for parent PLUS loans. In many cases, a parent must go through multiple steps to be eligible for forgiveness. This may include getting a Direct consolidation loan that includes PLUS loans, and then getting on the appropriate income-driven repayment plan. There are other forgiveness programs more accessible to student borrowers.
Finally, consider that having parent PLUS loans can affect your ability to meet other financial goals. You might be unable to set aside enough for retirement. If you’re hoping to get a loan for a major purchase like a home or a car, the parent PLUS loan might make it more difficult to get approved.
Make sure you understand the costs and fees associated with a parent PLUS loan and are prepared to pay them.
Alternatives to a parent PLUS loan
You don’t have to get a parent PLUS loan to help your child attend college. The earlier you start planning for college costs, the more likely you’ll be able to avoid borrowing to pay for your child’s school. You may also be able to reduce the amount your child needs to borrow for college.
- Save ahead of time. If you still have time on your side, start saving now. Consider putting money aside in a 529 plan or Coverdell account, or find other ways to save.
- Consider community college. Instead of starting at a more expensive four-year school, consider encouraging your child to start at a community college. The average cost for a public two-year school is $3,860, according to the College Board. Compare that to in-state tuition of $10,950 for a four-year school. And that’s not even considering the cost of room and board. Your student could save tens of thousands of dollars by starting at a community college and finishing at a four-year school.
- Military service. If it makes sense for your child, military service can help pay for college.
- Working during school. Reduce the need for debt by encouraging your child to work during school. Federal Work-Study can help enhance financial aid and ensure some income during college.
- Loan forgiveness. There are several loan forgiveness programs, including Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness, and forgiveness through the federal Health Corps. Help your child consider different career paths that could lead to loan forgiveness so they can feel more comfortable taking on student loans.
The bottom line
As a parent, it’s important to do what you can to help your child succeed in life—and that might include helping them attend college. Although you should consider what you can contribute to your child’s education, don’t forget about your duty to yourself. You’re also responsible for setting up a comfortable retirement. Assistance you provide to your child shouldn’t prevent you from reaching your own goals.