Parent student education loans allow parents to help their kids pay for a university education. There are two types of parent loans to select from―federal parent PLUS loans and parent loans—and terms may differ together.
Parent loans can also differ greatly from student loans available to students and perhaps are more expensive. Here's what to know before you borrow.
What Is a Parent PLUS Loan?
Parent PLUS loans are student education loans offered by the U.S. Department of Education. These loans come with standardized interest rates and costs for all who qualify and allow parents to borrow up to the child's total cost of attendance, that is based on the school.
How to Qualify for a parent or gaurdian PLUS Loan
To get approved for any parent PLUS loan, you will need to meet three major criteria:
- Be the biological or adoptive parent from the student: In particular, they must be an undergraduate student who is attending an eligible school on at least a half-time basis. Grandparents and legal guardians are ineligible, even if they're primarily accountable for the student's care, but stepparents can qualify in certain situations.
- Not have an bad credit history: You'll undergo a credit assessment when you apply, which is not required for most kinds of federal student education loans. However, the Department of Education is only looking for specific negative information, such as bankruptcy, defaults, repossession and foreclosure.
- Meet the general federal financial aid requirements: Your child must complete the Free Application for Federal Student Aid (FAFSA) and meet basic eligibility criteria.
How Do Parent PLUS Loans Work?
After your child has submitted the FAFSA, you'll apply for a parent PLUS loan using a separate application.
If approved, the Department of Education will disburse the borrowed funds proceeds straight to your child's school to pay for tuition, fees, room and board along with other costs. If there are remaining funds, the school will disburse these to your child for other eligible expenses.
Before you apply, though, it's important to know how parent PLUS loans vary from federal loans open to undergraduate students. Here's a quick summary for the 2023-23 school year:
| Features | Parent PLUS Loans | Undergraduate Direct Loans |
|---|---|---|
| Interest rate | 7.54% | 4.99% |
| Loan fee | 4.228% | 1.057% |
| Maximum loan amount | Total price of attendance | Up to $12,500 per year and $57,500 overall, based on year in school and dependency status |
| In-school deferment | Upon request | Automatic |
| Access to subsidized loans | No | Yes |
| Eligibility for income-driven repayment | One plan (requires consolidation) | Up to four plans |
| Eligibility for student loan forgiveness | Public Service Loan Forgiveness (PSLF) (requires consolidation) | PSLF and teacher loan forgiveness |
How Parent PLUS Loan Repayment Works
The default for parent PLUS loans is immediate repayment. When the loans are disbursed towards the school, your loan servicer will contact you about beginning your monthly payments.
However, you might request deferment while your child is within school. If you qualify, automobile start making monthly obligations until 6 months after your child graduates, leaves school or falls below half-time enrollment.
If you are struggling to maintain your monthly obligations, you might be eligible for the following relief options:
- Income-contingent repayment (ICR) plan: The ICR plan can help to eliminate your monthly obligations towards the lesser of 20% of your discretionary income (which is 100% of the poverty guideline for your state of residence and household size) or what you will pay on the repayment schedule having a fixed payment over the course of 12 years, adjusted according to your income. Remember, you will need to consolidate your loans to become eligible for this plan.
- Deferment or forbearance: Depending on your situation, you might be eligible for deferment or forbearance on your monthly payments. Options will vary based on your circumstances.
- Other repayment plans: You can choose a graduated repayment plan, which starts with lower payments that increase with time, or perhaps an extended repayment schedule, which can go so long as 25 years.
Parent PLUS Loan vs. Private Student Loans
Parents can also obtain financing from private lenders to assist their child pay for college. However, there are some key differences between federal and private parent loans:
- Eligibility requirements: While both need a credit check, private lenders have more stringent creditworthiness requirements and may deny you in case your credit score or earnings are too low.
- Interest rates: While parent PLUS loans only include fixed interest rates, private lenders offer both fixed and variable rates. Additionally, private lenders offer a range of interest rates, that are determined by your creditworthiness. Based on your circumstances, you may get a lower or more rate than what the Department of Education offers.
- Fees: Parent PLUS loans have a relatively high upfront fee, while private lenders typically don't charge one.
- Repayment: Both federal and private parent loans require immediate repayment, but while parent PLUS loans could be deferred if you request it, that's not the case with private loans.
- Relief options: You won't obtain access to income-driven repayment or loan forgiveness programs with private loans. Additionally, private lenders typically offer less generous deferment and forbearance options if you cannot afford your instalments.
If your finances are in excellent shape and you may obtain a lower interest rate having a private lender, it can make sense to choose private parent loans over parent PLUS loans. That's particularly true if you do not anticipate needing use of federal relief programs.
If your financial future is within question, though, or perhaps your credit is detrimental enough to qualify for a minimal rate on the private loan, go for federal loans.
How Do Parent Student education loans Impact Your Credit?
Whether federal or private, parent student loans can affect your credit in a variety of ways. When you initially apply, you may undergo a hard credit check, which has a minor temporary impact on your score.
Additionally, adding a new credit account will affect your period of credit history and amount owed. If one makes on-time payments, your parent loans will help you build your credit rating. But if you miss even one payment by Thirty days or even more, it can possess a significant negative impact on your credit profile and remain on your credit reports for seven years.
Paying off the borrowed funds can positively or negatively affect your score, depending on the circumstances. Note, however, that positive payment history will stay on your credit history for 10 years.
Consequently, it's imperative that you apply for parent student education loans only if you're confident that you'll be able to repay your debt.
Should Are applying for Parent Student education loans?
Before you apply for parent PLUS loans or private parent loans, consider the potential effect on your finances, especially if you're near to retirement.
If your little one can be eligible for a federal undergraduate loans with lower interest rates—particularly if they are able to get subsidized loans—it may be better to allow them to apply rather than you. Should you still want to help, you can even agree to result in the monthly obligations. That way, you may be in a position to cut costs, and also the loans won't impact your credit.
It is also a good idea to encourage your child to look for different ways to cover college, including scholarships, grants and part-time work.
But if federal loans aren't an option for the child or they need more money compared to what they can borrow, parent loans could be a good way to supplement their efforts.