Paying for College: Part III – Direct PLUS loan

paying for college

College tuition doesn’t have to eat a hole through your stomach.

So far we have discussed two different types of financial aid: Pell Grants and Stafford Loans. For students attending local city or state universities these two types of aid might actually cover the bulk of your financial needs. However, students who intend on going to more expensive universities, or who don’t qualify for need-based aid, have probably noticed these options don’t come close to covering all of their expenses. Fortunately, there are many alternatives we have yet to explore in our ongoing conversation about financial aid. In College Compass’ third installment of the “Paying for College” series, we will discuss a loan designed specifically for parents: the Parent Loan for Undergraduate Students, also known as a Direct PLUS loan. The most important thing you need to know about Direct PLUS loans is they let parents borrow the remaining cost of college attendance for their undergraduate children, something we will discuss in much greater detail later on in this post.

PLUS loans have a complicated history. In the past, PLUS loans were given out through the Federal Family Education Loan Program; the FFEL was disbanded in early 2010, although the PLUS program was considered important enough to keep. Today, PLUS loans are dispersed through the Direct Loan Program, thus the name Direct PLUS loans. Unlike other types of loans, most of which have an option allowing parents or cosigners to eventually transfer full responsibility of the loan to the student, PLUS loans cannot be transferred and are, at least legally, solely and entirely the parent’s responsibility.

All the financial aid types we have discussed so far share one feature – in order for a parent to qualify for a Direct PLUS Loan, their child must fill out and submit a Free Application for Federal Student Aid (FAFSA). Universities and colleges require a FASFA from the student before accepting a Direct PLUS loan because schools encourage, to the point of requiring, that students explore all of their financial options before approving a big loan, even if that loan is in the name of the parent and not the student. This is the primary reason I refer to the amount parents can borrow through Direct PLUS loans as the ‘remaining cost’ of attendance, rather than just the ‘cost of attendance.’ The official PLUS policy is that parents can borrow the entire cost of school minus whatever financial aid their child has qualified for. If parents want to they could borrow the entire cost of attendance, but it is in everyone’s best interest to apply for other kinds of financial aid before even considering that option.

As we continue our discussion of Direct PLUS loans, you’ll notice there are many differences between PLUS loans and other educational grants and loans. This is because the Direct PLUS loan is not need based. The PLUS loan may share certain features with other federal financial aid programs, but there are key differences when it comes to rates, charges, and accessibility.

An important difference between this type of loan and other education loans is the Direct PLUS loan requires a credit check. This aspect of the Direct PLUS loan illustrates why it is unique and how its differences separate it in crucial ways from similar loans.

One consequence of PLUS loans requiring a credit check is you can be denied a PLUS loan if you don’t pass a credit check. The two biggest reasons someone would be refused a PLUS loan are bankruptcy or defaulting on any previous education loan within the last five years. Unfortunately, there are not many ways to get around a failed credit check; no other immediate family members, like an uncle, grandparent, or sibling, can take out this loan instead of a parent, or even cosign with a parent. If the parents are divorced it is possible for one, the other, or both parents to take out a PLUS loan; however, the amount taken out by both parents cannot be more than the total or remaining cost of tuition. The best option after being denied a Direct PLUS loan is to pursue a private loan, where there are many more options when it comes to circumventing a failed credit check.

Another result of the PLUS loan not being need based is that the interest rate is much higher than other federal education loans. Like Stafford Loans, the interest rate to a Direct PLUS loan is fixed. However, the current interest rate is 7.9% (compared to the 3.4% rate for a subsidized Stafford loan and the 6.8% rate for an unsubsidized Stafford loans). The interest rate for PLUS loans may also change from year to year, depending on a variety of economic and political factors.

Like every other loan or grant, you have to apply for a PLUS loan every year you intend to use one. This may result in a hodgepodge of financial statements and bills that are hard to keep track of and even harder to pay. There is a way to navigate these treacherous financial waters: debt consolidation. Consolidation is not mandatory, but can sometimes be necessary; especially if you intend to pay for college entirely through financial loans and aid. Consolidation allows individuals to essentially bundle their various debts into a single debt and monthly payment. An important aspect of consolidation is there is no restriction on the number of times you may consolidate; so, if you are taking out loans every year to pay for school, you have the option of consolidating your debt every summer. Consolidation gives financially stressed individuals a degree of control when it comes to planning and structuring their debt, however debt consolidation does have certain negative implications. Consolidation usually leads to a lower monthly payment; a lower payment means it will take longer for you to pay off your debt; the longer it takes to pay off a debt, the more interest will be charged on that debt.

The Direct PLUS loan is also subject to fees. These fees are generally modest and similar to those associated with Stafford Loans; currently, with a 3% origination fee and 1% default fee.

The cost of college doesn’t stop with a diploma; most people pay for school years after graduation. Like most of the important decisions you make in life, success requires planning. The Direct PLUS loan is a great option for parents who want to ensure they can afford the expense of their child’s college education; however, it is important to remember it is not the only option. Like any other loan or financial assistance program, there are benefits and risks that go with it. Any successful plan for financing higher education should include out of pocket payments, grants, loans, and scholarships.

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