How Parent PLUS Loans Work

Many parents want to help their children earn a degree. But as the cost of college continues to climb, more families are turning to borrowing loans to pay for college.

Parent PLUS loans are a type of federal student loan available to parents of undergraduate students. They come with competitive fixed rates and offer many of the same borrower perks as other federal loans. But are they right for you? This guide will help you decide.

How do parent PLUS loans work?

Parent PLUS loans are one of two types of PLUS Loans offered by the Department of Education. PLUS Loans for graduate and professional students are the other type.

Also called Direct PLUS Loans, parent PLUS loans are intended to help cover additional school costs once Subsidized and Unsubsidized Direct Loans have been exhausted. These parent loans are taken out in the parent's name, unlike student loans that a student borrower takes out directly, or private student loans that a student takes out but that parents cosign for.

Like all federal loans, PLUS Loans come with a fixed rate and special borrower benefits. PLUS Loans are available to parents who meet specific criteria:

• You are the biological, adoptive, or (in some cases) stepparent of a dependent undergraduate student who is attending an eligible school at least half-time.
• You don’t have an adverse credit history, such as recent foreclosures or defaults. Or, if you do, you meet additional requirements such as documenting extenuating circumstances or obtaining an endorser who, like a cosigner, agrees to share responsibility for your loan.
• You meet other general eligibility requirements for federal student loans, including being a U.S. citizen or qualifying noncitizen.

Benefits of parent PLUS loans

There are many important perks of parent PLUS loans that parents and undergraduates should consider when deciding how to fund a college education. Here are some of the biggest advantages:

• Ability to borrow up to the full cost of attendance: While there are lifetime and annual borrowing limits for other types of federal student aid, parent PLUS loans aren't subject to these restrictions. You can borrow up to the school-certified cost of attendance, minus other aid like scholarships and grants.
• Fixed interest rates: Parent PLUS loans offer competitive interest rates and neither the rate nor monthly payments will change over time. By contrast, some private student loan lenders offer variable-rate loans, meaning that the interest you pay can change regularly.
• More relaxed credit requirements: While private student lenders do a full financial assessment when deciding whether to provide a loan, parent PLUS loans are easier to qualify for. You simply can't have adverse credit or, if you do, must have justification for the issues or an endorser to guarantee the loan.
• More repayment options: Private student loans for parents typically come with a set payment schedule that can't be changed. Parent PLUS loans offer multiple payment options, and parents can even access income-driven plans and loan forgiveness if they consolidate their PLUS Loans.
• Deferment and forbearance options: Parents facing financial hardship can qualify for deferment or forbearance in multiple situations, including for economic hardship or while undergoing cancer treatment. There are more options to pause payments with PLUS Loans than with private loans.

Potential drawbacks of parent PLUS loans

It is important to consider the downsides of parent PLUS loans as well as the advantages when deciding if these are the best parent student loans for your needs. Here are some of the biggest downsides:

• Repayment is the parent's responsibility: Although the parent is borrowing to help their child, ultimately they are taking on the debt as their sole responsibility. This is different from cosigning, which involves simply guaranteeing a loan that a child has taken out on their own behalf.
• There's a relatively high interest rate: Although the parent PLUS loan interest rate is competitive in certain cases, it’s higher than the rate on Direct Subsidized and Unsubsidized Loans that are available to students. It may even be higher than the rate some private lenders charge for parent loans — especially for parents with good credit and a stable income.
• You pay an origination fee: There is an upfront origination fee when you take out parent PLUS loans. For loans distributed in the 2023-24 school year, the fee is 4.228%. Many private lenders offering loans to parents or students don’t charge an origination fee.
• The loans can impact a parent's credit history: Like any type of debt, a PLUS Loan will show up on the parent's credit record — potentially impacting their future borrowing ability. Taking out a new loan can also shorten their average credit age and, if parents make late payments or go into default, this will damage their credit as well.

How to apply for a parent PLUS loan

There are several steps involved in applying for a parent PLUS loan, including the following:

1. Obtain a Federal Student Aid (FSA) ID: Both the student and parent will need to create an FSA ID at StudentAid.gov. This will be important to complete the paperwork to obtain federal student aid.
2. Complete the Free Application for Federal Student Aid (FAFSA): The FAFSA form provides information to the Department of Education about your family’s personal and financial data. It's a prerequisite to get any type of federal aid and can be completed online on the StudentAid.gov website.
3. Complete the Direct PLUS Loan application for parents: Parents must submit a separate application for a parent PLUS loan. This involves a credit check and the entire process will take about 20 minutes. You can submit the form online.
4. Sign the Master Promissory Note (MPN): Finally, before funds are disbursed, you must complete a Master Promissory Note. This explains the terms and conditions of your loan and it can be submitted after successfully completing the Direct PLUS Loan application.

Repayment options for parent PLUS loans

There are some important differences between parent PLUS loans and private student loans — and your repayment options are a key factor.

Parents have many options to repay their PLUS Loans and can even change their repayment program over time. Here are some of the different ways parents can choose to pay off their federal debt:

• Standard Repayment plan: This plan involves making a fixed monthly payment, with the amount set to ensure your loan is fully paid off in 10 years.
• Graduated Repayment plan: This is designed to allow payments to gradually increase over time. Loans are typically paid off within 10 years under this plan, or within 10 to 30 years for Direct Consolidation Loans.
• Extended Repayment plan: This plan comes with fixed or graduated payments set to ensure your loan is repaid within 25 years.
• Income-Contingent Repayment: Parents can gain access to the Income-Contingent Repayment plan  if they consolidate their federal student loan debt. It caps payments at the lesser of 20% of your discretionary income divided by 12 or the amount you'd pay in fixed monthly payments on a 12-year repayment plan, adjusted based on income.

Alternatives to parent PLUS Loans

PLUS Loans are just one choice for parents who want to help their children complete their education. Other options include the following:

1. Private parent student loans: Private parent loans are available from online lenders, banks, and credit unions. You'll generally need to qualify based on your credit, but these loans are sometimes more affordable because there's often no origination fee and the rates may be lower for well-qualified borrowers.
2. Student loans in your child's name: Students can take out federal and private student loans on their own or with a parent cosigner. Unlike parent PLUS loans, they would be the primary or sole borrower responsible for repayment. Notably, students can access better loan terms and more perks with federal student loans than what’s available to their parents.
3. Scholarships, grants, and work-study programs: All of these options allow students to cover some school costs with money they typically don't have to repay.
4. College savings plans: Saving for college using special tools such as a 529 account can help parents and children to keep borrowing costs down.

It's a good idea to explore all of these options before deciding which is the best approach to fund a college degree.

Learn More: Parent PLUS Loans vs. Private Parent Loans

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