What is a Parent PLUS Loan? How Do They Work? Who Qualifies? Repayment Options?

Renee Layberry
May 4, 2021

The Federal Student Aid office offers direct Parent Plus Loans to parents of college students, who are helping to pay for their child's college education. With these FAFSA Parent PLUS Loans, parents (and legal guardians) can borrow up to the full cost of tuition and dorm expenses for their child, less whatever the student has received in financial aid and scholarships.   For many families, these loans are necessary to cover all of the costs that come with obtaining a higher education.  

How do Parent PLUS Loans work?

Each Parent Plus Loan has a fixed interest rate and an origination fee. These loans are not subsidized, like some other forms of financial aid. This means that the interest starts accruing as soon as funds have been issued. Interest will also accrue if the loan is moved to deferment.   It is important to note that Parent Plus Loans are not considered student loans in any fashion. They are not co-signed either. These loans are entirely the responsibility of the parent.  

Parent PLUS Loan eligibility

While Parent Plus Loans can be easy to obtain, there are a few eligibility requirements that must be met in order to qualify.    Borrowers must be the biological parent, step-parent, or adoptive parent of a student who is enrolled at least half-time in a school considered eligible. They must also meet the requirements for federal student aid. And those applying with adverse credit history may have to obtain a creditworthy endorser in order to qualify.   It is important to note that even if a student is living with their grandparents, the grandparents may not apply for the loan unless they have legally adopted the child.   Photo by Quince Creative
 

Parent PLUS Loan interest rate

The interest rates on Parent Plus Loans are often higher than those on private student loans. For example, Direct Plus Loans paid out between July 1, 2020, and July 1, 2021, have a fixed interest rate of 5.30%. A fixed-rate is one that does not change for the life of the loan.   Parent Plus Loans also have loan fees. These are a percentage of the total loan. This amount is deducted proportionately from each loan disbursement, so you’ll actually receive less money than you borrow. Interest is of course calculated on the full amount.   Loan origination fees for loans disbursed between Oct. 1, 2020, and Sept. 30, 2021, are 4.228% of the total loan.  

Parent PLUS Loan application

To start the Parent Plus Loan process, the student’s parents or legal guardians must apply by completing the FAFSA, or Free Application for Federal Student Aid. Watch your dates: It has to be applicable to the academic calendar year when you wish to borrow the funds.   The application requires:
  • Verified FSA ID.
  • School name.
  • Student information.
  • Personal information including income and a social security number to run a credit check.
  • Employer’s information.
  Once submitted, the borrower will be given a list of Parent Plus Loans for which they are eligible.  

When does repayment start on a Parent PLUS Loan?

Unlike subsidized student loans, borrowers are expected to begin making payments on a Parent Plus Loan after the first disbursement of loan money. They can request that the loan be deferred until the student completes their graduation, leaves school, or drops below half-time. Even if the loan is deferred, however, interest will continue to accrue.   Photo by Susan Sewert
 

Parent PLUS Loan repayment options

The processing companies know that college can be costly, and repaying loans can be difficult as circumstances change. Because of this, Parent PLUS Loans are subject to a wide range of repayment options depending on financial needs and situation.  

Standard repayment

For parents and guardians who can afford their monthly payments, a standard repayment option will probably be best suited for them. For the standard repayment option, the total of your loan, including the interest, will be amortized over a ten year period.    This gives the borrower one set monthly payment amount over the next ten years. While this form of repayment will have higher per month costs, it also means that the total loan will be paid off within ten years.  

Graduated repayment

If the monthly payments using the standard option are too high to fit into the parent's budget, there are some other options. One is a graduated repayment.    With a graduated repayment plan, the parent would have a lower monthly payment to start, typically just over the actual interest. This will continue for two years and then will gradually increase every two years thereafter.   The term for repayment under a graduated plan largely depends on the balance of the loan and whether or not it is consolidated. Terms can range from 10 to 30 years with this option.  

Extended repayment

An extended repayment option also uses a level of amortization that the standard payment does, but at a longer repayment term. If the federal loans have been consolidated, then the terms depend on the total balance of the loan. If the loans have not been consolidated and the total is $30,000 or higher, a 25-year repayment option can be chosen.    It is important to note that even though the monthly payments will be lower with an extended repayment, the total amount of interest will be higher over the life of the loan.   Photo by Karolina Grabowska
 

Income contingent repayment option

If the Parent Plus Loan is part of a Federal Debt Consolidation Loan and repayment was entered into after July 1, 2006, the borrower might be eligible for an income-driven repayment plan   This repayment option bases the monthly payment on the borrower's income instead of the total of the amount owed. The payment cannot exceed 20% of discretionary income, which is calculated as the amount that the borrower's income exceeds 100% of the poverty line.    Once they have made 25 years of payments, the balance of the loan will be forgiven.  

Public student loan forgiveness

If a borrower works full-time in a public service job that qualifies, has consolidated their student loans, and has paid their loans for ten years using an income-driven repayment plan, they may qualify for public service loan forgiveness   This reduces the forgiveness period from 25 years to 10, for those who work in a qualifying field.  

Refinancing

There is always the option to refinance a Parent Plus Loan as a private loan. This may be the best option for borrowers who have a good credit score. They can often get a lower interest rate for their repayment.    The drawback is that once the loan is moved, it will no longer be considered a Parent PLUS Loan. That means the borrower does not have extended or income-driven repayment options. They also cannot qualify under any form of student loan forgiveness.   More >> Should you refinance your student loans?  

Deferment

Borrowers also have the option to defer payments for up to three years, as long as the student using the funds is attending school on a half-time basis. The interest will continue to build during this deferment period, which will increase the amount of the overall debt.    Because the accruing interest can make the debt larger and more difficult to pay, it is only advised to request deferment if the borrower is unable to afford making the monthly payments.  

Can a Parent PLUS Loan be transferred to the student?

Unfortunately, a Parent Plus Loan cannot be transferred to the student for whom the loan was acquired. The loan approval was based on the parent’s or guardian’s financial information, and so the responsibility for the debt until it is paid in full is theirs.   The only way around this is to have the student secure a private loan and use those funds to pay off the Parent Plus Loan in full.