Pros and Cons of Parent PLUS Loans: A Complete Guide

You borrowed a Parent PLUS Loan to help pay for your child’s education, but you didn’t understand what you signed up for. Or maybe you’re about to borrow one of these types of loans. And now you’re wondering whether it makes more sense to borrow from the federal government or a private lender.

Ahead, we’ll review the pros and cons of Parent PLUS Loans, including different forgiveness options and loan payment protections that help ensure you’re not stuck with these loans forever.

A Parent PLUS Loan acts as a financial bridge for parents aiming to support their child’s academic journey. It’s a federal student loan where parents, not the students, are the primary borrowers, commit to repay the borrowed amount to finance their child’s education.

Here’s a snapshot of what it entails:

• Purpose: Specifically designed for parents or guardians of dependent undergraduate students. It covers education-related expenses after other financial aids, like grants, scholarships, and work-study programs, have been used.

• Eligibility: The student must be enrolled in an eligible institution at least half-time. While the loan is not based on financial need, the parent borrower should not have an adverse credit history. Being a U.S. citizen or a permanent resident is essential.

• Loan Amount: Parents can borrow up to the complete cost of attendance, deducting any other financial assistance the student receives. This flexibility makes sure most or all the educational expenses are covered.

• Application Process: Unlike the commonly known subsidized and unsubsidized loans which use the Free Application for Federal Student Aid (FAFSA), the Parent PLUS Loan has its distinct application process.

The table gives an overview. But there’s more to each advantage. Let’s explore the specific advantages of Parent PLUS Loans. This will help us understand why they might be a good choice for many families.

Parent PLUS Loans offer distinct advantages when financing your child’s education. Dive into the unique benefits that make these federal loans a great choice for many families

Pro 1: Fixed Interest Rates

PLUS loans have fixed interest rates for the life of the loan. This means the interest rate on your loan won’t change, even if national interest rates rise. A fixed rate helps you plan your repayment if your aim is to pay the loan balance in full.

Starting on July 1, 2023, Parent PLUS Loans have a fixed interest rate of 8.05%. This rate is higher than some federal student loans. But it’s often lower than rates from private lenders.

Related: How Does Student Loan Interest Work?

Pro 2: Borrow Up to the Cost of Attendance

Parent PLUS Loans let parents cover the entire cost of their child’s education. So if your child goes to a school like the University of Chicago, which costs about $90 thousand per year, you can borrow the full amount each year. Over four years, you could borrow almost $400 thousand in Parent PLUS Loans.

The amount you can borrow with a Parent PLUS Loan depends on how much it costs for your child to go to school, minus any other financial aid they get. There is no predetermined Parent PLUS Loan maximum amount. The school customizes the loan amount. It fills the financial gap that remains after considering other aid.

Pro 3: Flexible Repayment Options

Compared to private student loans, Parent PLUS Loans offer a handful of flexible student loan repayment plans you can easily change to fit your needs:

1. Standard Repayment Plan: This is perfect if you’re looking to pay off your loan quickly.

2. Graduated or Extended Repayment Plans: If you want a reduced monthly payment, these plans extend your repayment term to make it more manageable.

But if you want to make payments based on your income, you first need to combine your loans into the Direct Loan Program. You can easily do this for free on StudentAid.gov. Until you consolidate, income-driven repayment plans are off limits.

After you consolidate, you’ll be able to choose one IDR Plan: the Income-Contingent Repayment Plan.

While the ICR Plan offers some flexibility, the payments may still be too much for your budget. Payments under the ICR Plan are based on your discretionary income and family size. If you need an even lower monthly payment, look into a workaround that will close soon: the double consolidation loophole.

Since President Biden ended the payment pause, my team and I have helped dozens of parents use this workaround to enroll in the Saving on a Valuable Education (SAVE) Plan.

Pro 4: Deferment and Forbearance Options

Parent PLUS loans also qualify for deferment and forbearance. Both options let you pause payments in some cases. You can defer Parent PLUS Loans while your child is enrolled at least half-time in an eligible school, and up to six months after they graduate. This means you can delay payments while your child is still studying, and for a period after they finish their studies.

Forbearance can be requested under several circumstances, including if you’re unemployed or facing significant financial hardship, serving on active duty in the U.S. armed forces, serving in the Peace Corps, in a full-time rehabilitation training program for disabled veterans, or receiving support from a state agency for vocational rehabilitation, drug abuse treatment, or mental health services

Pro 5: Potential for Loan Forgiveness

Parent PLUS loans are eligible for limited forgiveness options, notably through the Public Service Loan Forgiveness Program and ICR Plan.

• PSLF requires full-time work at a qualifying government or nonprofit employer, repayment under an income-based repayment plan, and 120 qualifying payments.

• The ICR Plan, one of the income-driven repayment plans, calculates monthly payments based on income and family size, offering forgiveness after 25 years. Parent PLUS loans must be consolidated into a Direct Consolidation Loan to access ICR.

These loans may also be discharged due to your death, disability, or if your child’s school closed.

Related: What Happens to Parent PLUS Loans When You Die?

Pro 6: Tax-Deductible Interest

Interest paid on Parent PLUS loans is tax-deductible. You can deduct up to $2,500 per year in interest paid on the loans. But there are income limits. Plus, other tax filing rules may apply.

Single filers earning less than $60,000 and married couples making less than $125,000 can claim the full deduction. But the deduction is phased out for single filers at $75,000 and for married couples at $155,000.

Note: The tax deduction is a reduction of taxable income. That means it can be claimed even if you don’t itemize on your federal income tax return.

Related: Are Parent PLUS Loans Tax Deductible?

Pro 7: Not Solely Based on Credit Score

You don’t need a specific credit score to have your Parent PLUS Loan application approved. You can borrow a Direct PLUS Loan if you don’t have late payments, defaults, or charged off debts on your credit report. You also don’t need a specific income. You can borrow Parent PLUS Loans even if you’re unemployed or retired.

While Parent PLUS Loans have their merits, they also come with certain drawbacks. Here are the potential challenges and considerations you should know before committing to this type of financial aid.

Con 1: Credit Check Requirement

Parent PLUS loans require a credit check, which can be a downside if you have adverse credit history. This check doesn’t involve your credit score but looks for negative credit events, such as debt 90 days past due, bankruptcy, foreclosure, tax lien, or wage garnishment.

A hard inquiry from the check might slightly lower your credit score temporarily.

If adverse credit is found, you could still get a loan with an endorser (a cosigner) without such credit issues, but your child can’t be the endorser.

The new loan will appear on your credit report and could affect your score because of the new balance and account status.

Con 2: Higher Interest Rates and Fees

Parent PLUS Loans have higher interest rates and fees compared to some other federal student loans.

As of July 1, 2023, the fixed interest rate for Parent PLUS Loans is 8.05%. This rate is higher than some other federal student loans, but it can be lower than rates offered by private lenders.

Additionally, Parent PLUS Loans come with an origination fee, which is 4.228% of the loan amount. This fee is deducted from each loan disbursement, adding to the overall cost of the loan.

Con 3: No Automatic Grace Period

Unlike other student loans, there isn’t a Parent PLUS Loan grace period like other student loans. Typically, repayment starts once the loan is disbursed. But parents can ask for a deferment while their child is in school and for six months after graduation, leaving school, or dropping below half-time enrollment.

Con 4: Risk of Over-borrowing

Parent PLUS loans have large borrowing limits, making it possible for parents to take on too much debt. Once approved for the loan, the school sets the loan amount based on its cost of attendance. But a school’s cost of attendance is usually more than most students pay, which can lead to parents borrowing more than their child needs for college.

If you have other outstanding debt, such as a mortgage, you may find yourself in over your head when it’s time to pay back the loan.

Con 5: Interest Accrual During Deferment

Interest accrues on Parent PLUS loans during deferment. Parent PLUS loans are unsubsidized, so interest begins to accrue on the outstanding loan balance when funds are disbursed and continues to accrue even if the loan is in deferment.

The damage doesn’t stop there. The interest that accrues while your child is in school is capitalized (added to your principal balance) when you start repaying the loan. This increase the total amount you’ll repay.

Related: When Does Student Loan Interest Capitalize?

Con 6: Limited Repayment Options Compared to Other Federal Loans

Parent PLUS Loans have limited repayment options compared to other federal student loans. While other federal student loans offer many income-driven repayment plans, Parent PLUS Loans are only eligible for the Income-Contingent Repayment (ICR) plan, and even then, only if they are consolidated into a Direct Consolidation Loan.

But as I shared above, to get an even lower payment into the SAVE Plan, you must use a fast-closing workaround.

Related: Are Parent PLUS Loans Eligible for SAVE?

Con 7: Responsibility Lies with the Parent

The parent who takes out a Parent PLUS Loan is responsible for paying it back. Parent PLUS Loans are federal loans that parents can use to help pay for their child’s college education. Legally, the parent borrower is responsible for repaying the loan, and the child does not have to repay it.

The U.S. Department of Education won’t let you transfer the loan your child, your spouse, or anyone else. The only way to do that is for your child or spouse to refinance the loan in their name. Unfortunately, few lenders offer this refinancing. And those that do, many not offer lower interest rates than you have.

Relate: Can Parent PLUS Loans Be Transferred?

Parent PLUS loans can fill funding gaps up to the full college cost, minus other aid, and offer fixed interest rates for predictable repayment. They’re also flexible, with various repayment plans and eligibility for forgiveness programs like PSLF.

But they require a credit check, carry an origination fee, accrue interest during deferment, and place full repayment responsibility on the parent who borrowed the loans instead of their spouse or child.

Taking on a Parent PLUS Loan is a significant financial commitment that should not be made lightly. It offers a substantial lifeline for covering education costs, yet comes with strings attached that could affect your financial future.