Parent PLUS Loans and Covering College Costs

Is that Parent PLUS Loan listed on your child's college financial aid offer letter the right choice for your family?

During college decision season, many families open award letters from multiple schools offering more than just grants and scholarships. Often, families with a middle class income find themselves with an offer for a Parent PLUS Loan on the award letter and assume it’s a special form of financial aid. But the Parent PLUS Loan is still just a loan and needs to be repaid like any other. The Parent PLUS Loan may be good for some, but not the right fit for others. Here are some things to consider before committing to the federal program:

You don’t have to take Parent PLUS just because it’s offered

Remember, financial aid award letters are an offer. Accepting grants and scholarships should be an automatic. However, the Parent PLUS Loan is only supplemental. It may be used to cover the remaining college bill, but if a very large amount is required, it may be time to have a deeper discussion with your child about college costs and options available financially.

It’s in the parent’s name only

Like the name of the program says, Parent PLUS Loans are in the parent’s name, not the student’s. Since the award letter is addressed to the student, it’s easy to get this confused. The student’s credit history would be completely uninvolved if this loan is successfully repaid, even if it is the student supporting the payments on behalf of the parent.

No direct loan refinancing is available

Once originated, there is no way to refinance the Direct Parent PLUS Loan through the Federal Direct Consolidation Program to earn a rate reduction, although they can provide consolidation using the weighted average of all Parent PLUS Loans combined. Some parents turn to home equity with a lower rate to pay off their Parent PLUS Loan instead.

Full repayment begins immediately

Be ready to begin full repayment on the Parent PLUS Loan as soon as it is disbursed. If the family faces financial hardship, an appeal may be submitted to adjust payments, but the debts will continue to accrue.

There is a fixed 6.41% interest rate

This rate will not increase, but it will also not be reduced later in cases of federal student loan consolidation.

Origination fee is 4.288%

This is actually a comparatively high origination fee, and it basically covering the risk of easy credit approvals for most applicants. The amount is removed from the loan at the time of origination. That means if you apply for $10,000, only $9,571.20 actually pays to the account.

Other options are available

First and foremost, ensure that you and your child have exhausted all scholarship and grant options available. Private scholarships, institution-sponsored awards at your child’s school, community grants, and more: scholarship opportunities are everywhere and extraordinarily varied, so take advantage. Don't stop at whatever is listed in your official award letter.

Then, if you still have gaps to fill, take a look at a private student loan to compare your options. A private loan may provide more competitive rates and zero origination fees, making it a better option for some but not all families. A private loan is in the student’s name, and the parent can cosign to help them get approved. Private loans carry more consumer protections to prevent borrowers from over-borrowing, but as with any debt for education, carefully consider the alternatives and have a plan for repayment.

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