Federal PLUS Loans: What They Are and How to Use Them
If you're a parent of a college-bound student looking for ways to help them pay for expenses not covered by traditional financial aid, then you may want to consider Federal Direct PLUS Loans. These loans have been designed specifically for parents and guardians of dependent undergraduate students, and can provide a flexible way to finance education costs.
The following is an overview of how PLUS Loans work, including what they are, what the benefits are, and how to apply for them.
What Are Federal Direct PLUS Loans?
Federal Direct PLUS Loans are a type of federal student loan that enables parents and guardians to borrow money to help pay for their child's education. These loans are different from traditional student loans in that they require a credit check to ensure that parents are able to repay the loan.
The maximum amount that parents can borrow through the Federal Direct PLUS Loan program is determined by the cost of attendance at the student's school, minus any other financial aid the student is receiving. Unlike other federal student loans, interest rates on PLUS Loans are not fixed, and are determined annually by Congress.
Currently, the interest rates on PLUS Loans are at 6.28%, which is relatively high compared to other federal loans. However, they are still lower than many private education loans, making them an attractive option for families looking for low-cost financing.
What Are the Benefits of Federal Direct PLUS Loans?
There are several benefits to taking out a Federal Direct PLUS Loan:
1. They can be used for anything that is not covered by other forms of financial aid - including tuition, books, housing, and other college-related expenses.
2. They offer flexible repayment options with terms ranging from 10 to 30 years, allowing parents to repay the loan on a schedule that works best for their financial situation.
3. They are eligible for loan forgiveness programs, such as Public Service Loan Forgiveness and Teacher Loan Forgiveness. These programs allow borrowers to have their remaining loan balance forgiven after a certain number of years of service in a qualifying field.
4. In some cases, interest can be tax-deductible, reducing the overall cost of the loan.
5. They are backed by the federal government, which means that borrowers are protected from some of the more predatory lending practices that are often associated with private loans.
Overall, Federal Direct PLUS Loans offer families an affordable way to finance their child's education, while minimizing the financial burden that can often come with borrowing for college.
How Do You Apply for Federal Direct PLUS Loans?
Before applying for a Federal Direct PLUS Loan, parents will need to complete the Free Application for Federal Student Aid (FAFSA) available on the government's student aid website. This form is used to determine the amount of federal financial aid a student is eligible for and must be completed every year that the student is in college.
Once the FAFSA is submitted, parents can apply for the PLUS Loan by submitting an application on the Federal Student Aid website. The application process requires some basic information about the parent's income and credit history, as well as the student's school and financial aid package.
If the parent is approved for the loan, they will be required to sign a Master Promissory Note (MPN), which outlines the terms and conditions of the loan. This document is a legally binding agreement between the borrower and the lender and should be read carefully before signing.
It's important to note that if the parent's application is denied, they may still be able to borrow with a cosigner who has a strong credit history. However, this may not be an option for all families, and can increase the overall cost of the loan due to higher interest rates.
Are There Any Downsides to Federal Direct PLUS Loans?
While there are many benefits to taking out Federal Direct PLUS Loans, there are also some potential downsides that parents should be aware of:
1. They require a credit check, which can be a barrier to some families.
2. Interest rates are not fixed, meaning they can increase every year.
3. They have higher interest rates than other federal loans, such as Stafford Loans, making them more expensive over the life of the loan.
4. They have origination fees, which can add to the cost of the loan.
5. They cannot be transferred to the student, meaning that the burden of repayment falls entirely on the parent.
Overall, Federal Direct PLUS Loans are a good option for families who need assistance in paying for college, but should be used in conjunction with other forms of financial aid, such as grants and scholarships.
Final Thoughts
Paying for college can be a daunting task, but Federal Direct PLUS Loans can help alleviate some of the financial strain. As with any financial decision, it's important to carefully consider the pros and cons before taking out a loan, and to explore other options for financing your child's education. With careful planning and strategic borrowing, families can make college more affordable and accessible for everyone.