One of the types of federal student loans available are Parent PLUS Loans. These types of loans are meant to fill the gaps when a family does not have enough money to pay for college that cannot be met by the student's federal loan amount. Here are 6 common misconceptions about Parent PLUS loans that are critical for you to understand before signing on the dotted line.
Misconception #1 – Students have to help pay back Parent PLUS loans.
PLUS loans are only in the parent’s name and their child is not responsible for payment. In addition, a PLUS loan cannot be transferred to the student. If it's important to you for your student to be responsible for paying back the loans, a private loan in the student’s name with you as a co-signer is a better option.
Misconception #2 – Parents must have income to get a PLUS Loan.
Parents don’t have to meet any income level to qualify for a PLUS loan. In fact, parents can be unemployed and still take out a PLUS loan.
Misconception #3 – Private loan interest rates will be higher than PLUS loans.
The interest rate for Parent PLUS loans will be 5.3% beginning in July 2020. (The rates are adjusted on July 1st of each year) If your credit is strong, it is worth the time to see if a private loan has better rates. Keep in mind that federal loans also have provisions like loan forgiveness that you can't get with private loans.
Misconception #4 – The loan amount is based on how much parents can afford to pay.
It may seem crazy, but the total amount you can borrow is only limited by the cost of attendance minus any financial aid your student receives. This creates a scenario where it is much too easy to borrow well beyond what you can afford to pay back.
Misconception #5 – Parents don’t have to start paying their PLUS loans until after their child has graduated.
You will need to start making monthly payments as soon as the loan is disbursed. However, it is possible to defer payments until after graduation. If you do that however, interest will accrue from the date of the loan adding, which will increase the overall cost of the loan.
Myth #6 – Interest is the only charge to consider when comparing loan options.
In addition to interest, the PLUS loan adds an administrative fee of 4.236% for 2019/20, which is taken out of each loan disbursement. When comparing a PLUS loan to a private loan, you need to consider the total overall cost including both interest and fees.
Final considerations on when to use a Parent PLUS loan?
A PLUS loan is a good option when your credit does not qualify for better rates using a private loan, and you are comfortable being 100% responsible for debt obligation. Also, you want to make sure that your student has completely maxed out their federal student loans available first. Lastly, you always want to consider your overall debt and retirement position before signing up for a PLUS loan. If your retirement is under funded or you have other debts you are still trying to pay off, proceed with caution before taking on additional debt.
Mike Bink, AAMS®, CCFS®
Mike works with families to simplify the college funding process and is widely recognized as an expert in college planning. He is passionate about empowering families to become informed consumers of higher education so that they don't pay a penny more for college than they absolutely have to.