Direct Parent PLUS Loan Information

What is a Direct Parent PLUS Loan?

Many parents wonder if there is a parent loan option available to help them pay for their child’s college education. The Direct Parent PLUS Loan is a type of “parent student loan” made in the parent’s name, and backed by the U.S. government. Parents can borrow up to the total cost of attendance, minus any other financial aid received, regardless of your family’s financial need. In simple terms, any parent can borrow money for college, regardless of your family’s income.

Benefits of Direct PLUS Loans

The Direct Parent PLUS Loan comes with many great benefits that make repayment simple and affordable:

• No payments until 6 months after your child graduates or drops below half-time enrollment, on loans made on or after July 1, 2008.
• You can apply for temporarily payment relief on your loans if you run into financial difficulty (“deferment” and “forbearance” options available).
• There are several different student loan repayment plans available to fit your needs.
• No prepayment penalty.
• May be eligible for tax deductions, depending on family income.
• Credit criteria are less stringent than those for private loans.

In addition to these loan benefits, many parents find the Direct Parent PLUS Loan attractive if they are unable to access home equity loans or 401k withdrawals to pay for their child’s college. In an economy where unemployment is high, some parents are also weary of tapping into their savings reserves. If you are a parent in this position, remember that the Direct Parent PLUS Loan has no prepayment penalty. You can take out the loan now, and pay it back as soon as you feel comfortable with your financial situation.

Drawbacks of Direct PLUS Loans

If you are looking to shoulder the costs of your child’s education, the Parent PLUS Loan may be a good option for you. However, many parents today cannot afford to handle their children’s college debts. PLUS loans also have a 4% loan origination fee. If you would prefer that the college debt burden remain in your child’s name, you should start to research private student loans. You will probably still need to help your child obtain a private loan by co-signing, but your child will be the primary borrower.

Direct Parent PLUS Loan Interest Rate

Direct PLUS Loans have a fixed interest rate of 7.9% fixed. Up until recently, this might have been considered a very good interest rate. However, some parents feel that they can find a better interest rate by refinancing their house at a low interest rate or taking out a personal loan from a bank.

Although rates are currently at all-time lows, parents may find that they cannot do better than the current PLUS Loan rates. Remember these things when looking at alternatives to the Direct Parent PLUS Loan:

1. If you are taking out a variable rate loan, make sure you consider what the interest rate could be over the course of the loan. If it takes you many years to pay back the loan, interest rates could fluctuate up or down.
2. Many parents have lost the equity in their homes during the recent housing crisis and can no longer refinance or tap into a home equity line of credit.
3. Although there are many advertisements for low interest rates, the credit markets are still very tight. Unless you have excellent credit, you may have a hard time getting approved for a loan or getting a low interest rate.

Direct Parent PLUS Loan Credit Requirements

All Direct PLUS Loans require a credit check. To get approved for a Direct Parent PLUS Loan, the parent borrower cannot have an adverse credit history or have defaulted on any other federal education debt. However, the Department of Education’s website states that “In some cases, you may also be able to obtain a Direct PLUS Loan if you document to our satisfaction that there are extenuating circumstances related to your adverse credit history.”

Remember, the credit requirements for Direct PLUS Loans are much less stringent than any private loans offered by banks or credit unions. If a parent cannot get approved for a Direct PLUS Loan, it will be very difficult to obtain other types of private funding.