I Was Awarded a Parent PLUS Loan, Should I Take It?

Several different types of financial aid are available for students enrolling in college, including scholarships, grants and loans. While scholarships and grants require no repayment, borrowers must eventually repay the full balance of their student loans plus interest.

As the parent of a student in college, you may be offered a unique type of financing known as a Parent Loan for Undergraduate Students, or PLUS loan. Before you decide whether to accept a PLUS loan, it helps to learn a little about how these loans work.

What is a PLUS Loan?

A PLUS loan is a federal student loan offered to the parents of children whose educational expenses won’t be covered by other types of aid. Unlike other student loans, PLUS loans are taken on by the student’s parents, rather than the student himself. This means that the parent will be held responsible for repaying the full value of the loan, along with any interest that accrues. Although students can elect to make payments toward the loan’s balance, PLUS loans can never be transferred into the student’s name.

Comparing Federal Student Loans

PLUS loans differ from other federal student loans considerably. Some of the primary differences include:

• Higher interest rates –Although all types of federal student loans come with interest, the interest rates associated with PLUS loans are often higher than with other federal student loans. These loans typically involve origination fees as well, thus increasing the cost of the loan even more.
• Harder to borrow – Other types of student loans are available to students regardless of their credit scores or lack of credit history. However, PLUS loans will be available only to parents with a good credit history.
• Fewer repayment options– Whereas other types of student loans are eligible for a variety of repayment options, including income-based plans, PLUS loans are not. Instead, they must be repaid within 10 years to 25 years, depending on the parent’s preference.

Important Considerations

For some families, taking out a PLUS loan may be the only available option. However, it’s important to consider all of the implications of this type of financing carefully before you sign on the dotted line. Some important questions to consider include:

Can I Afford to Repay the Loan?

In some cases, a parent may plan for his or her child to repay the loan after graduating college. However, the loan will be the legal responsibility of the parent, not the child. If your child is unable or unwilling to make the payments, your credit score will suffer. Thus, you should agree to this loan only if you will be able to repay it yourself.

Are Other Options Available?

In general, it’s better for the student to take out loans in his or her own name first. Other types of student loans offer more repayment options and better terms. In addition, parents with good credit scores may be able to find better interest rates on a private student loan. Be sure to explore these options before you make a decision.

Will I Be Able to Begin Repayment Now?

PLUS loans don’t come with the same grace period as other types of student loans. In fact, repayment will automatically begin 60 days after the loan has been disbursed. Although you can apply for deferment while your child remains in school at least half-time, interest will continue to accrue while the loan is deferred. For this reason, it is best to begin repayment on a PLUS loan immediately if your finances will allow you to do so.