PLUS Loan Basics for Students and Parents

Parents are expected to help pay for college for their undergraduate students. But many have not been putting aside money in a college fund along the way. With the recent dips in the housing market, taking out a second mortgage is not an option for most people. And, the stock market decline has made those savings less accessable. For parents who cannot come up with the amount of money that they are expected to pay, the PLUS loan makes a lot of sense.

A PLUS loan is a federally guaranteed loan to parents to help them assist their children in realizing their dreams for a higher education. Parents can borrow the full out of pocket costs for their child’s higher education. To figure out how much you are eligible to borrow, take the school’s cost of attendance figure (tuition plus living expenses) and subtract any financial aid in the form of scholarships, grants, and other federally backed student loans.

The interest rate on PLUS loans is attractive. If your student’s school arranges loans directly with the federal government, the interest rate is 7.9 percent plus a one time 4 percent origination fee. If your student’s school allows you to shop around for loans, the maximum interest rate a bank can charge for a PLUS loan is 8.5 percent. If a school allows you to shop around, they may provide you with a preferred lenders list. You are not required to go with banks on this list and can often find better rates with a little research.

There is a credit check for PLUS loans. If a parent has been rejected by two lenders, they should call the student’s financial aid office and ask to participate in the “lender of last resort” program. The college has a legal obligation to help put you in touch with a lender who can try to make the loan despite your circumstances.

Students whose parents have been rejected for PLUS loans qualify for more student loans on their own. Student loans do not require credit checks.

Because of the current credit crunch, parents are advised to line up a PLUS loan as early as possible.

While interest can be deferred while the student is in school, interest accrues on the loan. Therefore, it makes sense to begin payments on at least the interest, if not the principal itself, during this period. Parents who borrow $10,000 for their student’s freshman year will end up having to pay $14,000 if they haven’t made the interest payments during the student’s four years of school.

The major benefit of the PLUS loan over other types of lending is that it has a low, fixed rate. A disadvantage is that PLUS loans, like other federally backed student loans, cannot be discharged in bankruptcy.

PLUS loans can allow parents to make their children’s college dreams come true.

Need money for college? Use FastWeb’s free scholarship search to find information on more than 600,000 scholarships!