PLUS Loan Explained: How It Works, Types, and Examples
Summary:
PLUS loans are federal student loans designed to help parents and graduate students pay for educational expenses not covered by other financial aid. This guide breaks down the two types of PLUS loans—Parent PLUS loans and Grad PLUS loans—explaining their eligibility requirements, application process, repayment plans, and pros and cons. PLUS loans offer a viable way to fill financial gaps but come with high interest rates and credit-check requirements. This article explores how these loans work, how they compare to other options, and answers frequently asked questions.
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What is a PLUS loan?
PLUS loans, also known as Direct PLUS Loans, are a type of federal student loan offered by the U.S. Department of Education. These loans are designed to help parents of dependent undergraduate students (through Parent PLUS loans) and graduate or professional students (through Grad PLUS loans) cover the cost of education that isn’t met by other types of financial aid. While these loans can be a helpful financial resource, they come with specific eligibility criteria, interest rates, and terms that borrowers should fully understand before applying.
Types of PLUS loans
Parent PLUS loans
Parent PLUS loans are designed for parents or legal guardians of dependent undergraduate students. These loans help cover the remaining costs of education after other financial aid—like grants, scholarships, and student loans—has been applied. Parents who take out these loans are responsible for repaying them, even though the loan is used to fund their child’s education.
Grad PLUS loans
Grad PLUS loans are offered to graduate or professional students who need additional funding beyond what their federal loans (such as Direct Unsubsidized Loans) provide. These loans also cover the difference between the cost of attendance and other aid, but graduate students themselves are responsible for repayment.
Eligibility criteria for PLUS loans
While most federal student loans do not require a credit check, PLUS loans do. The eligibility criteria differ slightly between the two types:
For Parent PLUS loans
- The borrower must be the biological, adoptive parent, or legal guardian of a dependent undergraduate student enrolled at least half-time in a qualifying institution.
- The student must meet the eligibility requirements for federal student aid, including being a U.S. citizen or eligible non-citizen.
- The borrower must pass a basic credit check that determines if they have an adverse credit history.
For Grad PLUS loans
- The borrower must be enrolled at least half-time in a graduate or professional degree program at a qualifying school.
- The borrower must meet basic eligibility for federal student aid and not have an adverse credit history.
- Like Parent PLUS loans, these loans require a credit check, but not based on credit score. It looks for major delinquencies or defaults on significant loans.
Adverse credit history and PLUS loans
Unlike other federal student loans, PLUS loans require a credit check. However, the credit check for PLUS loans is less stringent compared to private loans. Here’s what constitutes an “adverse credit history” for a PLUS loan:
- A bankruptcy discharge, foreclosure, or tax lien within the past five years.
- Default on a loan, such as a mortgage or credit card, for more than 90 days.
- Collections or charge-offs on significant debts.
If a borrower has an adverse credit history, they may still be eligible for a PLUS loan by obtaining an endorser (someone with a clean credit history who agrees to repay the loan if the borrower cannot) or by proving extenuating circumstances.
Application process for PLUS loans
The application process for PLUS loans differs slightly between Parent PLUS loans and Grad PLUS loans but follows similar steps:
For Parent PLUS loans
- Complete the FAFSA (Free Application for Federal Student Aid): Before applying for a PLUS loan, parents and their dependent students must complete the FAFSA. This determines eligibility for federal financial aid.
- Apply for the PLUS loan: After the FAFSA is complete, parents apply for the Parent PLUS loan online via the federal student aid website. This includes a credit check.
- Sign the Master Promissory Note (MPN): If approved, the parent signs an MPN, which is a legal document agreeing to the terms of the loan.
- Receive loan funds: Once processed, the loan funds are disbursed to the school to cover tuition, fees, room, and board. Any leftover funds are sent to the parent or student for additional expenses.
For Grad PLUS loans
- Complete the FAFSA: Like Parent PLUS loans, the graduate student must complete the FAFSA to determine eligibility for federal aid.
- Apply for the Grad PLUS loan: The graduate student applies for the loan through the federal student aid website and undergoes a credit check.
- Sign the MPN: After approval, the student signs the Master Promissory Note, agreeing to the loan terms.
- Receive loan funds: Loan disbursement follows the same process as Parent PLUS loans, with funds going directly to the school.
Interest rates and fees
PLUS loans have higher interest rates compared to other federal student loans. For the academic year 2023-2024, the interest rate for PLUS loans is 7.54%, which is fixed for the life of the loan. Additionally, PLUS loans carry a loan origination fee, which is a percentage of the loan amount deducted from each disbursement. For loans disbursed between October 1, 2023, and September 30, 2024, the origination fee is 4.228%.
These higher rates and fees mean that while PLUS loans provide access to necessary funding, they can be costly over time, especially if the borrower does not take advantage of repayment plans or loan forgiveness options.
Repayment options for PLUS loans
One advantage of PLUS loans is their flexibility in repayment. Borrowers have several repayment options:
Standard repayment plan
Borrowers make fixed payments over 10 years. This plan has the highest monthly payments but results in the least interest paid over time.
Graduated repayment plan
Payments start lower and gradually increase every two years. The term remains 10 years, but more interest is paid compared to the standard plan.
Extended repayment plan
Borrowers can extend their repayment term to 25 years, which lowers the monthly payment but significantly increases the total interest paid.
Income-Contingent Repayment (ICR)
Parent PLUS loan borrowers who consolidate their loans can access ICR plans, which base monthly payments on the borrower’s income and family size. After 25 years of qualifying payments, any remaining loan balance may be forgiven.
Income-Driven Repayment Plans (IDR)
Grad PLUS loan borrowers may access income-driven repayment plans, such as PAYE or REPAYE, which cap payments based on a percentage of their income and extend the term to 20 or 25 years. Loan forgiveness is available after making the required number of qualifying payments.
Example of a parent PLUS loan in action
To illustrate how a Parent PLUS loan works, let’s take an example of a family planning for college:
The Adams Family
John and Lisa Adams have a daughter, Emily, who has just been accepted into a four-year university. The total annual cost of attendance at Emily’s school is $40,000, including tuition, room, board, and other fees. Emily receives $20,000 in scholarships and grants, leaving the family with a $20,000 gap to cover. After exhausting federal student loans in Emily’s name and other savings, the Adams family still needs $15,000 to pay for her first year of college.
John and Lisa Adams have a daughter, Emily, who has just been accepted into a four-year university. The total annual cost of attendance at Emily’s school is $40,000, including tuition, room, board, and other fees. Emily receives $20,000 in scholarships and grants, leaving the family with a $20,000 gap to cover. After exhausting federal student loans in Emily’s name and other savings, the Adams family still needs $15,000 to pay for her first year of college.
John and Lisa decide to apply for a Parent PLUS loan to cover the remaining $15,000. They complete the FAFSA, apply for the Parent PLUS loan through the Department of Education’s website, and pass the required credit check. They receive approval, sign the Master Promissory Note, and the $15,000 loan is disbursed to Emily’s school. The school applies the funds to her account to cover the remaining tuition and fees, and any leftover funds are refunded to John and Lisa to cover additional education-related expenses, such as books or transportation.
After graduation, John and Lisa will begin making payments on the Parent PLUS loan. They can choose from standard, graduated, or extended repayment plans based on what works best for their financial situation.
Example of a grad PLUS loan in action
Now, let’s explore a case study for a Grad PLUS loan:
Meet Sarah, a law student
Sarah is pursuing a law degree and her tuition at a private law school is $60,000 per year. Sarah has already taken out the maximum in Direct Unsubsidized Loans, which amounts to $20,500 annually, but this still leaves her with a significant funding gap. After applying for scholarships and other aid, she’s left with $35,000 in remaining educational costs.
Sarah is pursuing a law degree and her tuition at a private law school is $60,000 per year. Sarah has already taken out the maximum in Direct Unsubsidized Loans, which amounts to $20,500 annually, but this still leaves her with a significant funding gap. After applying for scholarships and other aid, she’s left with $35,000 in remaining educational costs.
Sarah decides to apply for a Grad PLUS loan to cover the remaining $35,000. After completing her FAFSA, she applies for the loan and passes the required credit check. The loan is approved, and the funds are sent to the school to cover tuition and fees. Sarah receives any remaining funds to help with books and living expenses.
Once she graduates and passes the bar, Sarah has a six-month grace period before she must begin repaying her Grad PLUS loan. She plans to enroll in an Income-Driven Repayment (IDR) plan that caps her monthly payments based on her income, knowing that she may also qualify for Public Service Loan Forgiveness (PSLF) if she works in the public sector.
PLUS loan alternatives to consider
Before opting for a PLUS loan, it’s important to explore other potential funding options that might offer lower interest rates or more favorable terms. Here are some alternatives worth considering:
Federal Direct Subsidized and Unsubsidized Loans
For undergraduate students, Direct Subsidized Loans are need-based and have lower interest rates than PLUS loans. While students are still in school, the government pays the interest on these loans. Direct Unsubsidized Loans, available to both undergraduate and graduate students, do not require proof of financial need, but the interest begins accruing immediately. These loans have fixed interest rates that are typically lower than PLUS loans, and no credit check is required.
Private student loans
Private student loans are another option, though they come with their own set of considerations. Private lenders often require a credit check, and interest rates can vary widely based on the borrower’s creditworthiness. However, if you or your co-signer has excellent credit, you may secure a loan with a lower interest rate than a PLUS loan. Private loans, however, do not offer the same repayment flexibility as federal loans, such as income-driven repayment plans or loan forgiveness options.
529 savings plan
A 529 College Savings Plan allows families to save for education expenses in a tax-advantaged account. Using funds from a 529 plan can reduce or eliminate the need for loans altogether. While the contributions to the plan are made with after-tax dollars, the earnings on these investments grow tax-free, and withdrawals are tax-free when used for qualifying educational expenses.
Understanding the impact of PLUS loans on financial planning
Borrowing a PLUS loan can have long-term financial implications for parents and students alike. It’s crucial to understand how these loans might affect your future financial goals and planning.
Impact on parents’ financial health
For parents, taking on a Parent PLUS loan could affect their ability to save for retirement or make other significant financial decisions. Since repayment of these loans starts shortly after disbursement, parents should consider how these additional monthly payments fit into their budget. Moreover, high-interest rates on PLUS loans could lead to parents paying significantly more in interest over the life of the loan, potentially impacting their long-term savings goals.
Student loan burden for graduate students
Graduate students relying on Grad PLUS loans should carefully consider how their future salary will align with the debt they incur. While Grad PLUS loans are useful for covering large educational costs, they also come with higher interest rates. Before borrowing, graduate students should estimate how long it will take to repay the loans based on expected starting salaries in their field. If pursuing careers in fields with lower salaries, they may want to explore repayment plans like Income-Driven Repayment (IDR) or Public Service Loan Forgiveness (PSLF).
Considerations for loan consolidation or refinancing
After graduation, both Parent PLUS and Grad PLUS loan borrowers may consider consolidating their loans or refinancing through a private lender. Consolidating federal loans allows borrowers to combine multiple loans into a single payment, which can simplify repayment. However, refinancing with a private lender could result in lower interest rates but would eliminate access to federal repayment options and protections, such as income-driven repayment or loan forgiveness.
Conclusion
PLUS loans offer significant financial aid to both parents and graduate students looking to bridge the gap between the cost of education and available financial aid. While they come with higher interest rates and fees than other federal loans, they also provide flexibility in repayment and various options for managing debt. Borrowers must carefully consider the long-term financial impact, repayment terms, and interest rates when choosing a PLUS loan, as it may affect their financial situation for years to come. However, for those who need additional financial resources, PLUS loans remain a valuable tool for educational funding.
Frequently asked questions
Can I refinance a PLUS loan?
Yes, refinancing a PLUS loan is possible through private lenders. However, refinancing turns a federal loan into a private loan, meaning you’ll lose access to federal benefits like income-driven repayment plans and loan forgiveness programs.
Are PLUS loans eligible for Public Service Loan Forgiveness (PSLF)?
Grad PLUS loans are eligible for PSLF if the borrower works for a qualifying employer and makes 120 qualifying payments. Parent PLUS loans are only eligible if they are consolidated into a Direct Consolidation Loan and repaid under an Income-Contingent Repayment plan.
What happens if I can’t repay my PLUS loan?
If you cannot repay your PLUS loan, there are options like deferment, forbearance, and income-driven repayment plans (for Grad PLUS loans). However, defaulting on a PLUS loan can lead to severe consequences, including damage to your credit score, wage garnishment, and loss of tax refunds.
What is the maximum amount I can borrow with a PLUS loan?
The maximum amount you can borrow with a PLUS loan is the cost of attendance minus any other financial aid your student receives.
Is there a grace period for PLUS loans?
There is no automatic grace period for Parent PLUS loans, but parents can request to defer payments while the student is in school. Grad PLUS loans come with an automatic six-month grace period after the student leaves school.
Key takeaways
- PLUS loans are federal loans designed for parents and graduate students to cover educational expenses.
- These loans have higher interest rates and fees compared to other federal student loans.
- Repayment options include standard, graduated, extended, and income-driven plans for Grad PLUS loans.
- A credit check is required for all PLUS loans, but borrowers with adverse credit may still qualify with an endorser or proof of extenuating circumstances.
- PLUS loans can be refinanced, but doing so with a private lender means losing federal benefits.
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