What is a Parent PLUS Loan? A Complete Guide

#1 Student loan lawyer

Updated on May 8, 2024

Parent PLUS Loans are often a necessary consideration for parents seeking to help their children pay for school. On average, undergraduate tuition costs $36,436 annually, but scholarships only cover $8,005. This significant funding gap is a major concern, especially since half of parents have less than $15,000 saved for college expenses.

Parent PLUS Loans are unique because their credit score and income requirements aren’t as strict as private student loans. Plus, they provide flexible repayment options, including income-based plans, and are eligible for specific loan forgiveness programs if parents work in public service or make consistent payments over 25 years.

This article covers the need-to-know info about this financing option so you can confidently support your child’s academic dreams.

What is a Parent PLUS Loan?

A Parent PLUS Loan is a federal student loan available to parents of dependent undergraduate students. It’s designed to fill the gap between the total cost of educational expenses and any financial aid the student receives, such as grants and scholarships.

Here are some key points about Parent PLUS Loans:

  1. Type of Loan: These loans are part of the Direct PLUS loan program offered by the federal government. They have a fixed interest rate and multiple repayment options.

  1. Unsubsidized Nature: Unlike subsidized loans, where the government covers interest during specific periods, Parent PLUS Loan borrowers are responsible for all accrued interest.

  2. Eligibility: To apply, a child must have completed their Free Application for Federal Student Aid (FAFSA). This process assesses their eligibility for various forms of federal aid, including Parent PLUS Loans.

  3. Usage: Parent PLUS loans can cover attendance costs at accredited remote and in-person tertiary learning institutions in the federal student aid program.

  4. Borrower Responsibility: Since the loan is in the parent’s name, the parent borrower who takes out the loan is responsible for repaying the principal amount and any accrued interest.

  5. Child’s Contribution: It’s common for families to expect their children to contribute towards loan repayments. This can be done through direct payments to the parent’s account, but the legal responsibility for the loan remains with the parent.

  6. Refinancing Options: A child with a strong credit history may be able to refinance the loan with a private lender, potentially assuming full responsibility for the repayments.

  7. Alternatives if Ineligible: If a parent is denied a Parent PLUS Loan, their child might qualify for additional unsubsidized loans or consider private student loans. It’s essential to research and compare these options carefully.

Related: Pros and Cons of Parent PLUS Loans

Eligibility Criteria

There is no limit to the number of years you can receive a Parent PLUS Loan, so long as you and your child meet the eligibility requirements.

Parents:

  • Citizenship: You must be a U.S. citizen or eligible non-citizen.

  • Parental status: You must be the biological or adoptive parent (or stepparent in some instances) of the dependent student enrolled in an eligible institution.Only non-parent family members who have legally adopted a child are eligible to apply for a Parent PLUS Loan. This means that grandparents or legal guardians who have not adopted the child will not qualify, even if they are the child’s primary caregiver.

  • Financial status: There is no set credit score requirement, but you must pass a credit check to prove you have a good credit history. Defaulting on a previous federal student loan, bankruptcy, foreclosure, repossession, a tax lien, or wage garnishment within the last five indicates an adverse credit history. As does having debt equal $2,085 or more, that’s 90 days plus in repayment arrears. All these scenarios may disqualify you.

Students:

  • Citizenship: They must be a U.S. citizen or eligible non-citizen.

  • Educational status: They must be registered for half-time enrollment at a qualifying institution as an undergraduate.

Though anyone can apply for a Parent PLUS Loan, not all applicants are approved. If your Parent PLUS loan application is rejected, you can submit an online appeal based on extenuating circumstances, such as mistakes or omissions in your original application or outdated information. For example, if your credit score has improved since you applied.

EFC vs Parent PLUS Loan

There is some confusion about the relationship between high Expected Family Contributions (EFC) and Parent PLUS Loan eligibility. EFC is a baseline metric college financial aid offices use to determine the financial aid you receive.

It is not the amount you are expected to pay for your child’s college education but rather a measure of your financial need based on the information you provide in the FAFSA, such as family size, income, assets, and how many family members plan to attend college in a given year.

Students from households with a lower income will have a lower EFC than students from wealthier homes. The lower their EFC, the more financial aid they’ll get. While a high EFC won’t necessarily disqualify you from receiving this type of federal direct loan, it may affect your loan amount and interest rate.

Related: Parent PLUS Loan vs Private Loan

How to Apply

Obtaining a Parent PLUS loan through the U.S. Department of Education’s website (studentaid.gov) is a simple process that can be completed in just 20 minutes. Some institutions have their own application process, so check with your child’s school first.

Although it is possible to request a Parent PLUS Loan for a course at a different college, the loan is typically intended to cover the expenses at the school where your child is enrolled.

As an endorser (the individual legally responsible for repayment), you must sign a Master Promissory Note (MPN) before receiving the loan funds. This legally binding agreement lays out your responsibilities for repayment, including the agreed-upon interest rates and fees.

You do not need to visit the school to receive the loan funds, as they will be directly deposited into the school’s account to cover your child’s tuition, room and board (if applicable), and fees. Any extra funds are then disbursed to you or your child. Remember to reapply for every academic year you want to take out a Parent PLUS loan.

Related: How to Apply for a Parent PLUS Loan?

Loan Amounts and Limits

The maximum you can borrow is college attendance costs minus other financial assistance your child has received. Naturally, this varies from child to child and school to school. If your finances come up short, you can request a larger Parent PLUS Loan after filing, provided it’s for the “same school, same award year, and same student” and doesn’t exceed the cost of attendance minus other aid.

Related: Parent PLUS Loan Maximum Amount

Interest Rates and Fees

The fixed interest rate for Parent PLUS Loans disbursed between July 1, 2023, and July 1, 2024, is 8.05%. These loans are unsubsidized, which means the interest begins to accumulate from the time of disbursement.

You have the option to defer payments while your child is in school, but interest will continue to accrue and be added to the initial loan amount. Additionally, there is an origination fee of 4.228% of the total loan amount, deducted from the loan disbursement.

Parent PLUS Loans have been criticized by the New York Times and others for potentially leading families into debt cycles due to interest rates that are 0.5% to 3.05% higher than other federal student loans.

Below is a rough cost estimate for an average Parent PLUS Loan of $29,324, with an interest rate of 8.05% and a one-time processing fee of 4.228%.

Estimated Loan Repayment Costs

Initial Payment

Final Payment

Monthly Payment

Total Cost

1. Standard (10 years)

$365.58

$365.58

$365.58

$45,070.37

2. Graduated (10 years)

$243.71

$539.42

-

$46,047.65

3. Extended (Up to 25 years)

$237.57

$237.57

$237.57

$71,764.36

Parent PLUS Loan Repayment Options

After receiving a Parent PLUS loan, you will have to make monthly payments within 60 days. Like other loans, these payments continue until the total loan amount has been paid off.

Fortunately, there are various repayment plans available:

  • Standard repayment plan – spreads payments over ten years.

  • Graduated repayment plan – starts with lower payments that increase over time, usually every two years, over a ten-year period

  • Extended repayment plan – extends the repayment period to up to 25 years, which lowers monthly payments but increases the total amount of interest paid over the life of the loan.

  • Income-contingent repayment plan – reduces your monthly payment to no more than 20% of your income for 25 years. After that time, your remaining debt is forgiven. To qualify for this option, you have to consolidate your debt first.

  • Refinancing – taking out a new loan with a private lender to reduce interest, lower monthly payments and/or help repay your Parent PLUS Loan faster.

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Double Consolidation Loophole: Slash Your Parent PLUS Payments

Parent PLUS Loan Deferment Options

If needed, you can defer Parent PLUS Loan payments. The “in-school” deferment option postpones payment while your child is at least half-time in an eligible school and an additional six months after graduation or reduced enrollment.

The “economic hardship,” “unemployment,” and “military” deferments provide up to three years of postponement for borrowers experiencing financial difficulties, unemployment, or active military duty.

But interest continues to accrue during these deferment periods, causing your loan balance to increase.

Bottom Line

Federal Parent PLUS loans have a consistent interest rate throughout the repayment period, making them a stable and predictable option for financial planning.

Ultimately, the key is to carefully consider all options and make an informed decision that best suits your family’s financial situation.

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FAQs

Is a PLUS loan a subsidized loan?

Direct PLUS loans are unsubsidized, meaning that interest accrues throughout the life of the loan, including while your child is enrolled in school. Additionally, the borrower is charged a loan fee (equal to a small percentage of the amount borrowed) to process a Direct PLUS Loan.

Do parents have to pay back parent PLUS loans?

Yes, parents have to pay back Parent PLUS Loans. However, if the Parent PLUS loan is consolidated into a Direct Consolidation Loan in the child's name, the repayment responsibility is transferred to the child.

How Does a Parent PLUS Loan Work?

After a child completes the FAFSA form, their parent can apply online for a Parent PLUS Loan. Upon approval, the Department of Education will disburse the loan directly to the child's school to pay for expenses such as tuition, fees, room and board, and other eligible costs. Any surplus funds will be deposited into the parent’s account.

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