Federal Parent Loan for Undergraduate Students (PLUS)

If you are a student enrolled at least half time, your parents may be able to take out a loan for your college education. This loan is called the Federal Parent Loan for Undergraduate Students (PLUS). Unlike the Stafford Loan, which will appear solely in your name, the Federal Plus Loan will appear in your parent’s name and will be their responsibility to pay back.

Parental Loans for Undergraduate Students, or PLUS loans, are federally-guaranteed loans made to parents with good credit histories who want to help pay for their dependent child’s undergraduate education. Like Stafford Loans, PLUS loans are available through either the federal government (under the William D. Ford Federal Direct Loan Program) or from private lenders (under the Federal Family Education Loan Program). PLUS loans are not based on financial need, so parents of all income levels can receive a PLUS loan. The only requirement is that parents pass a credit check.

Tip: Step-parents are not eligible to apply for PLUS Loans, even though their income and assets must be reported on the FAFSA.

Federal Plus Loans are low-cost loans, an attractive alternative when parents are planning to use income or assets, besides the potential tax savings, as long as the deduction is made on interest paid. Although it is not a requirement, colleges may encourage parents to have their dependent students file a FAFSA, so they can receive the maximum financial aid they are eligible for.

A parent, who has a satisfactory credit rating, is a U.S. citizen, national or eligible non-U.S. citizen, with a dependent, undergraduate student enrolled full or half-time, can apply for a Federal Plus Loan. A parent can even co-sign an alternative loan either federal or private, rather than taking out a PLUS Loan when their goal is to build up the students credit history disregarding the higher-cost option. When parents cannot pass the credit check, they might still be able to receive a Federal Plus Loan after demonstrating that extenuating circumstances exist for their current credit score, or when students agree to endorse the loan promising to repay it they parents do not.

Parents are allowed to borrow up to the total cost of the student’s education. There is a yearly limit on a Federal Plus Loan equal to the student’s cost of attendance minus any other financial aid the student may receive, and the maximum lifetime amount borrowed per student cannot exceed the total cost of education for the student.

Although, there is no minimum loan amount, what is not often mentioned but required is that parents must not be in default or owe a refund to any FSA program as this situation may influence their eligibility. Annual Federal Plus Loan interests are variable and based on the 91-day T-Bill plus 3.10%, capped at 9.00%.

Repayment of this loan begins within 60 days after the loan is fully disbursed, but standard repayment terms allow up to 10 years to repay a Federal PLUS Loan, in addition to any other credited periods of deferment and/or forbearance. However, this type of loan is tax deductible, and a tax adviser can suggest a convenient plan for repaying education loans.

To apply for a Federal Plus Loan, parents can visit their bank, or any other financial institution such as credit unions, or savings and loan associations that offer funds to both students and parents for educational loans. Parents must be aware of the service and other convenience factors before applying for a Plus Loan.

In fact, it is easy to apply online, reducing time and saving money in online account maintenance and quick credit approval decisions. The charge to get a Federal Plus Loan is a fee of up to 4 percent of the total loan, just like the fee a student pays for a Stafford Loan.

Even though it is not required to qualify for a PLUS Loan, students should fill out the Free Application for Federal Student Aid (FAFSA) so that they can be considered for the maximum amount of financial aid that they may be eligible for. If the parent’s application is rejected, the student is still may still be eligible for additional unsubsidized Federal Stafford Loan funds.

Basic Considerations

Interest rate: The interest rate, set each July, is variable and tied to the 91-day Treasury bill. The maximum interest rate allowed is 9 percent. PLUS loans are not subsidized; that is, the lender charges interest from the date a loan is issued until it is paid in full.

Borrowing limits: The full cost of a student’s college attendance can be borrowed, minus whatever other financial aid (loans, scholarships, grants, or work-study) the parent or student has received.

Other terms and Repayment: PLUS loans have no grace period. Once the funds are borrowed, parents must begin to repay the loan within 60 days of the final loan disbursement. In some instances, the principal and/or interest can be deferred, canceled, or considered for forbearance. The lender can explain any provisions that may apply to your situation.

Fees: Private lenders may add a 3 percent loan origination fee and a 1 percent insurance premium fee (they may waive these fees to gain your business). The federal government charges a combined 3 percent fee. These amounts are deducted from the amount of the total loan before you receive it.

Repayment: Begins within 60 days after the loan is fully disbursed. Allowed up to 10 years to repay a Federal PLUS Loan, in addition to any other credited periods of deferment and/or forbearance. However, this type of loan is tax deductible, and a tax adviser can suggest a convenient plan for repaying education loans.

Tax Deductable: Yes.