With more parents needing to finance a larger portion of their child’s education, they face various options that can be confusing. One of the most common methods for paying for college is using a Parent PLUS Loan. This financing method has advantages and disadvantages that parents and students must understand before making this decision. Proper borrowing decisions are critical to both the parents’ and students’ financial future.
For parents new to college student loans, a Parent Plus Loan may have appeared on your financial aid award letter. This item is a loan, which can make the net cost of college misleading.
PayForED has compiled a comprehensive list of student loan solutions to help parents and financial advisors navigate the process of paying for college when using a Parent PLUS loan.
What is a Parent PLUS Loan?
A Parent PLUS Loan is a federal loan to parents of dependent undergraduate students. To qualify for this federal loan, the parent and student must complete a FAFSA. The annual Parent PLUS loan limit is the yearly cost of attendance minus all the student financial aid received by the student for the upcoming year. The cost of attendance includes tuition, fees, room, board, books, supplies, and personal expenses. The Parent Plus Loans charge a 4.228% processing fee that the borrower can include in the cost of attendance.
The loan amount will be distributed to the school directly from the Department of Education. A credit balance will occur if the borrowed amount exceeds the total direct cost owed to the college. The direct college costs are tuition, fees, on-campus room, and board. The amount above these costs will result in a credit balance. The credit amount is usually transferred to the student for other college expenses, such as books, travel, and personal living expenses. The loan amount will be divided by the college’s terms, such as semesters, tri-semesters, or quarterly.
Possible PLUS Loan Limit Change in the Future
Under the current federal loan policy, PLUS loans have an annual cap limit of the cost of attendance and no lifetime limit. Due to the increasing college costs and the current student limit of $27,000 over the first four years, many parents are using Parent PLUS loans to fund the difference. In fact, people over 50 are the fastest-growing group of student loan borrowers.
The federal government, through multiple administrations, has discussed placing loan limits on all PLUS loans, including Parent PLUS and Grad PLUS loans. It is unclear what the limits will be and when they will be implemented.
Understanding the debt structure until graduation is critical. The colleges only provide one year of information. The students’ and parents’ financing decisions will determine their loan repayment and forgiveness options. The addition of PLUS loan limits could impact your college decision.
Parent Plus Interest Rate and Qualifying For a Loan
The interest rate on a Parent Plus loan is fixed each year for the life of the loan. The government determines the interest rate, which is reset annually on July 1. The May auction of the 10-year Treasury note determines the interest rate. The 2024-25 interest rate for a Parent PLUS loan is 9.05%.
In our blog article, Federal Student Loan Rate for Federal Loans, PayForED has listed the interest rate for the Parent PLUS loan for the current academic year. The processing fee amount is deducted from the loan before it is disbursed to the college, and most schools will add that fee amount to a student’s cost of attendance.
The private student loan interest rate is determined by each borrower through a formal underwriting process. The federal process sets the interest rate for all borrowers. There is no formal federal underwriting process, but the parent must have an average credit score and no payment delinquency within the past 180 days.
Parent PLUS Loan Accrues Interest
Parent PLUS loan interest starts accruing once the loan is disbursed to the college or university. If the parent does not pay the interest each month as it accrues, the interest will be added to the loan balance, thereby increasing the total amount owed. Depending on the amount that a parent borrows, this could add thousands of dollars to the loan balance at the time repayment starts.
The loan also has a six-month grace period after the student graduates or drops below half-time enrollment status. Families must remember that, as stated above, the loan interest will continue to accrue if not paid each month.
Parent PLUS Loans Legal Responsibility
A common misconception about the Parent Plus loan is regarding legal ownership. These loans are the legal responsibility of the parent who signs the promissory note. This signature acknowledges that the parents are legally and financially responsible for repaying this loan. Parents may have an arrangement with their child to repay this loan, but if their child decides not to repay the loan, it falls to the parent who signed the promissory note. The Parent PLUS will also appear on the parents’ credit report and may affect their credit score.
Since this is the responsibility of the parent who signs the promissory note, we believe a family timeline for retirement is essential. Understanding when the amount of money borrowed and the date repayment begins should be tied into your retirement plan. It will help determine how long the payments will continue and if they will impact your retirement date and cash flow.
Federal Loan Benefits
One of the significant advantages of a Parent PLUS loan is its federal loan benefits and protections. All federal loans carry a death and disability provision that eliminates the debt if the borrower experiences either of these events. This benefit will only release the parent’s portion of the loan, not the student’s if the parent dies or becomes permanently disabled.
The Parent PLUS loan has an additional benefit. If the student for whom the loans were used dies or becomes disabled, the Parent PLUS loans associated with that child will also be forgiven. This is a unique advantage of the Parent PLUS loans. Private student loans do not have this benefit. Federal loans have more repayment options to make repayment more affordable.
Parent PLUS Loan Consolidation, Payment, and Forgiveness
Parent PLUS loans can be consolidated. In most cases, they should be consolidated to extend the repayment period or make the Income-Driven Repayment (IDR) method available. I also often recommend it be done by each child’s loans. Parent PLUS loans do not have the same repayment options as federal student loans. The Parent PLUS loans cannot be consolidated with the student’s federal student loans. As stated above, parents need to realize that these loans are their legal responsibility.
The following repayment methods are available for Parent Plus loans: standard ten-year, standard extended repayment, graduated repayment, graduate extended, and income-contingent repayment. Consolidating the Parent PLUS loans may help a family organize the debt amount and lower the monthly payment. The only IDR method available is the Income Contingent Repayment (ICR) method.
In certain situations, Parent PLUS loans may be eligible for loan forgiveness. They need to be Direct Consolidated Federal Loans, and additional steps must be followed. If a parent is employed by a specific non-profit organization or a government agency, they may qualify for Public Service Loan Forgiveness (PSLF). For these parents, the debt could be forgiven after 120 on-time payments. This is another important question the parents need to consider: Which parent should take on the loans?
Parent PLUS Loan Income Tax Deduction and Planning
Parent PLUS loans are educational loans, and the borrower can claim an income tax deduction. When borrowers review their tax deductions, they can deduct up to $2,500 per year in interest paid on the Parent PLUS loan. Income limits and other tax filing rules may apply.
If the borrower decides to use the ICR method, filing as married and separate could lower the monthly payment. The borrower will need to consult with a tax professional to see if this is beneficial. This strategy may increase your tax exposure, but the lower monthly payment will offset it. Ensure the tax advisor possesses the necessary expertise. This tax deduction reduces taxable income. It can be claimed even if the parent does not itemize on his or her federal income tax return.
As more parents carry student debt into retirement, advanced repayment and loan forgiveness strategies can make this borrowing decision possible. Obtaining accurate advice on your debt plan can improve your loan repayment and forgiveness options in the long term.
Parent PLUS Loan Summary
Parent PLUS loans are just one loan strategy that families can use to pay for college funding shortfalls. They are among the most common and are often recommended by college financial aid offices. What is usually not explained to parents is that college financial aid offices are limited to specific loan options. They are legally not able to give personal financial advice, so they cannot provide all the options to families.
The most important thing families need to understand is how to calculate the total net cost and debt through graduation. By calculating the cost of education until graduation and identifying funding shortfalls, families can make more informed borrowing decisions.
When making these financing decisions, parents must consider options that the financial aid office cannot recommend. This could include home equity or a private loan. Parents need to evaluate the net cost of money and factor in the other risk items, such as repayment and forgiveness options.
As the cost of college continues to rise, families need to find the best way to pay for college without crippling their financial future. The final college bill will arrive in late June or early July. Parents need to understand the borrowing options since they can help them maximize their resources. If you need additional help, PayForED has a list of College Funding and Student Loan Advisors (CFSLA) on our website. The CFSLA has been trained to help families pay for college and understand how to manage their debt effectively.
Our In-College Payer software can help families better understand their required funds and debt structure. It allows students and parents to calculate the amount of debt needed and explore all repayment options after graduation. Most people do not understand that the debt structure will drive repayment options, which in turn will determine both the student’s and the parent’s financial futures.
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