5 things to know before taking out a Direct PLUS loan

Today, at least 3.4 million people have a Direct PLUS Loan, a form of student loan available through the federal government that parents can take out to help fund their child’s education. Together, they owe around $90 billion. While many parents want to help pay for their child’s college degree, taking out a PLUS loan is not without risk.

What You Should Know Before You Take Out a Direct PLUS Loan

Parents of eligible college students have access to Direct PLUS Loans through a federal government program. The US Department of Education serves as the lender, leaving many to believe that Plus loans are a safe option to help fund a child’s education.

However, like any loan, there are pros and cons to using PLUS loans. Here are five things you need to know before you take out a PLUS loan to help fund your child’s education.

PLUS Loan Eligibility, Amounts, Fees, and Interest Rates

First and foremost, it is important to understand that not every parent can receive a Direct PLUS Loan. Along with being a biological, adoptive, or (in some cases) stepparent of a dependent student who is going to an eligible school at least half-time, you also have to have a decent credit history. There are situations where parents with adverse actions on their credit report can qualify, but that usually involves having a cosigner or proof of extenuating circumstances.

Parents can borrow amounts that cover their child’s cost of attending their selected college, minus the value of any other financial aid the student receives. Each school defines its own cost of attendance so that that number can vary from one institution to the next. However, this means there is no formal limit on how much a parent can borrow each year through the PLUS loan program.

The federal government sets the interest rate on a PLUS loan. For disbursements made between July 1, 2018, and July 1, 2019, that rate was 7.6 percent fixed. While the rate on loan will not fluctuate, the federal government can change rates on new loans during each subsequent one-year period.

Direct PLUS Loans are unsubsidized. Interest begins accruing immediately. While you can defer the payments until your child leaves college, your balance will grow based on the interest added to the loan over time. If you do not request a deferment, payments start right away.

Along with interest charges, parents also have to contend with a loan fee. The percentage also varies depending on the year, though sits at 4.248 percent from October 1, 2018, to October 1, 2019. This fee is deducted proportionately from each disbursement. It does not increase the amount of the loan. Instead, it reduces the amount that is sent to the school or can be used for qualifying costs, keeping the loan balance the same.

Repayment Programs for Parent PLUS Loans are Limited

Like other federal student loans, there are several repayment options for PLUS loans. Along with a standard repayment structure – equal payments over 10 years – there are alternatives. The graduated repayment plan has lower payments initially. Every two years, the size of the payment increases throughout 10 years.

On the extended payment plan, the payments can be spread out over 25 years. This leads to lower monthly payments, but you pay significantly more in interest based on the longer life of the loan.

Federal student loans obtained by students come with additional repayment options that simply aren’t available on PLUS loans. As a result, it is important to understand which plans are and are not available, ensuring you can factor that in before you take out a PLUS loan.

Loan Repayment Responsibility is Non-Transferable

Some parents may consider funding a child’s education with a PLUS loan believing that they can transfer the debt to their child after they graduate. However, that isn’t an option. The parent is the legal borrower and cannot transfer responsibility.

There are instances where the debt may be discharged. For example, should the borrower or their student die, the remaining balance is discharged. This can also happen if the parent becomes permanently disabled.

Otherwise, the expectation is that the parent will repay the loan in full during the designated time frame.

PLUS Loans Impact Credit Scores and Borrowing Power

Federal student loans are reported to the major credit bureaus, including PLUS loans. If you obtain a PLUS loan, the balance and payment history appear on your credit. Even if you make on-time payments, the balance of the PLUS loan can impact your borrowing power. Lenders consider the total amount you owe and payment sizes when determining if you qualify for more credit, and these factors also affect your credit score.

Additionally, like any other loan, late payments, missing payments, and defaults are reported on your credit history, impacting your credit score.

Default Comes with Serious Consequences

Failing to repay a PLUS loan comes with serious financial ramifications. Defaulting puts a parent at risk of being subjected to a range of forced repayment efforts, including wage garnishments, tax refund offsets, and Social Security offsets.

Even if you are in a dire situation and file for bankruptcy, you can’t escape a PLUS loan. These loans can’t be dismissed during bankruptcy, regardless of the hardship they create or the severity of your financial situation.

There are steps parents can take if they cannot repay a PLUS loan, including requesting a deferment or forbearance. However, these are only temporary solutions that stop payments for a period or allow for lower payments. Neither forbearance or deferment stop the accrual of interest, so the balance of the loan can still increase if at least the monthly interest charges aren’t paid during that time.

Ultimately, PLUS loans are not risk-free. Since there aren’t formal borrowing limits, parents can find themselves with massive loans. If repayment becomes challenging, there are few options to pursue that can provide relief, as even bankruptcy won’t stop these loans in their tracks. While PLUS loans can be viable options to help fund a child’s education, it is important to consider the risks before you sign on the dotted line. Otherwise, you could be putting your financial well-being in jeopardy.