Parent Loans

If you are still a dependent on your parents, chances are, they wouldn't let you pay for your college education on your own. This is why parents themselves can avail of a loan to help your aid packages. This is called the federal Parents Loan for Undergraduate Students (PLUS) and it is formulated to pay for costs not covered by the student loans.

Student Loans vs. PLUS loans

The comparative advantage of the PLUS against student loans is that this loan is the sole responsibility of the parents, not the students. Even if the child agrees to pay for the loan, the parents will still be held responsible for delays in payment. Moreover, since it is the parents' prerogative, this type of loan does not have any cumulative limit so, the student can easily borrow money under the PLUS loan.

Unfortunately, the interest rates you get from PLUS loans are much higher than the student loan and there are no subsidies. With the private lenders, the interest rate is at 8.5% while with the direct loan it is only 7.9% and it also charges 4% for each disbursement check claimed. Although some private lenders give discounts for prompt and electronic payment, it is still more costly.

However, your parents' approval for a PLUS loan also affects your student loan limit. It decreases the cumulative maximum of your Stafford student loan.

To become eligible for a PLUS loan, the parents must have a modest credit check. Their credit history must pass standards. Adverse credit history can be determined by being three to six months delayed in payments. They should not have any Title IV loan in a period the past few years and have not been subjected to default determination, foreclosure, bankruptcy discharge, repossession, wage garnishment tax lien, or write-off.

While denial of a loan can seem to be a setback, it has an adverse effect on the limits your child can avail in their student loan. If the parents are denied or the school determines that they will be denied their PLUS application, then the child may increase their subsidized Stafford loan limit. It is enough for one parent to be denied for the child to avail of those advantages.

Application, Repayment and Consolidation

Parents who wish to apply for a PLUS are not required to file a FAFSA but it might be more advantageous to do so. However, the basic requirements are a loan application form and a master promissory note. Of course, the parents and the children must be US citizens, the child must be a enrolled at least half-time.

Repayment immediately begins sixty days after the entire loan has been disbursed and it is also up to ten years. Fortunately, due to new legislation parents who avail of the loan on behalf of their children may defer payment up until the six months grace period after their child's graduation or drops below full-time enrolment.

Although the PLUS loans can be consolidated, it cannot be placed together with a student loan. Consolidating the PLUS loan can also open up more options with regards to extending the repayment term. Also, the interest of privately provided PLUS loans can be capped by 0.5% since consolidated loans cap the interest rate at 8%.

Sometimes, parents who have a PLUS loan also consider other alternative loans but there are often trade-offs with such a decision. Also, some lenders may give parents leeway when it comes to repayment or with the other terms of the loan. Parents can easily discuss their concerns with the financial office for further clarification concerning the specifics.