With more parents needing to finance a 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 some advantages and disadvantages that both parents and students need to understand before making this decision. The 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 and can make the net cost of the college misleading.
What is a Parent PLUS Loan?
A Parent PLUS Loan is a federal loan that the government provides to parents of dependent undergraduate students. To be eligible for this federal loan, the parent and student must complete a FAFSA. There are loan limits on the amount of money that can be borrowed under this loan. The annual loan limit on a Parent PLUS loan is the annual cost of attendance minus all student financial aid received by the student in 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 can also be added to the amount requested.
The loan amount will be distributed to the school directly from the Department of Education. If the amount borrowed exceeds the total direct cost owed to the college, a credit balance will occur. 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 normally transferred to the student for the other college expenses such as books and personal living expenses. The total amount of the loan will be divided by the terms the college operates under such as semesters, tri-semesters, or quarterly.
Ownership of Loans
A common misunderstanding area of the Parent Plus loan is legal ownership. These loans are the legal responsibility of the parent who signs the promissory note. This means it is the legal financial responsibility of the parent to repay 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 parent’s 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 to retirement is important. 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 it will impact your retirement date and cash flow in retirement.
Parent Plus Interest Rate
The interest rate on a Parent Plus loan is fixed each year for the life of the loan. The interest rate is determined by the government and is reset every year on July 1st. The interest rate is determined by the May auction of the 10-year Treasury note. The 2021-22 interest rate for Parent PLUS loan is 6.284%.
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 into a student’s cost of attendance.
Federal Loan Benefits
One of the major advantages of a Parent PLUS loan is the federal loan benefits and protections that it offers. All federal loans carry a death and disability provision that eliminates the debt if the borrower should experience either of those events. This will only release the parent’s portion of the loan, not the student if the parent dies or becomes permanently disabled.
The Parent PLUS loan has an additional benefit. If the student for which the loans were used dies or becomes disabled, the Parent PLUS loans associated with that child would be forgiven also. This is a unique advantage of the Parent PLUS loans.
Federal Consolidation, Payment and Forgiveness
Parent PLUS loans can be consolidated. It is recommended it be done by each child’s loan. Parent PLUS loans do not have the same repayment options that federal student loans have. The Parent PLUS loans cannot be consolidated with the student’s federal student loans. As stated above, parents need to realize that these are their legal responsibility.
The following repayment methods are available for Parent Plus loans: standard 10 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.
In some situations, Parent PLUS loans can qualify for loan forgiveness. They need to be Direct Consolidated Federal Loans and some additional steps need to be followed. If a parent is employed by certain non-profits or a government agency they could qualify for Public Service Loan Forgiveness (PSLF). For these parents, the debt could be forgiven after 120 on-time payments.
Parent PLUS loans are educational loans and the borrower can get 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. There are income limits and other tax filing rules that may apply and need to be reviewed by your tax advisor.
This tax deduction is a reduction of taxable income. It can be claimed even if the parent doesn’t itemize on his or her federal income tax return.
Parent PLUS loan interest starts to accrue once the loan is disbursed to the college or university. This means that if the parent does not pay the interest each month as it accrues then the interest will be added to the loan balance causing the loan balance to increase. Depending on the amount that a parent borrows, this could add thousands of dollars to the loan balance at the time when repayment starts.
The loan also has a six-month grace period after the student graduates or drops below half-time enrollment status. It is important that families remember that during this time, as stated above, the interest will still continue to increase if not paid each month.
During the COVID National Forbearance. parents have benefited since the interest rate on these loans has been zero. That zero interest rate will expire on 9/30/2021 under current laws.
Parent PLUS loans are just one loan strategy that families can use to pay for college funding shortfalls. It is one of the most common and often recommended by the college financial aid offices. What is not often explained to parents is that the college financial aid offices are limited to only certain loan options. They are legally not able to give personal financial advice. As a result, they cannot provide all the options to families.
The most important thing families need to understand is the calculation of the total net cost and debt through graduation. By calculating the cost until graduation and identifying the funding shortfalls, families can make better borrowing decisions.
When making these financing decisions, parents need to 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 bill for college will arrive in late June or early July. Parents need to understand the borrowing options since it can help a family maximize their resources. If you find 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 structure their debt.
Our In-College Payer software can help families better understand their required funds and debt structure. It helps both students and parents calculate the amount of debt needed and all the repayment options after graduation. What most people do not understand is the debt structure will drive the repayment options. The repayment options will determine both the student’s and parent’s financial future.
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