It may be hard to believe, especially when you are in the umpteenth argument about teeth brushing or bedtime, but parents have a huge influence on the lives of their children. The impact of a parent on their child’s academic success is particularly important. Beyond advocating good study habits and future planning during primary and secondary school, parents can also help college-age children pay for the cost of their continuing education.
Parents who haven’t been able to save enough for their child’s tuition may consider a federal parent loan (Direct PLUS Loan) to cover some of the costs for their dependent, who must be enrolled at least half-time in an undergraduate program. Here are five important facts that parents and students need to understand before taking out a Direct PLUS Loan:
What amount can be borrowed?
The annual maximum amount for a Direct PLUS Loan is the difference between the cost of attendance and any financial aid the student receives.
How much interest and fees are charged on the loan?
The current interest rate on a Direct PLUS loan is a fixed rate of 7.08 percent (effective July 1, 2019 to June 30, 2020). There is also a loan fee, which is a percentage of the loan amount. Currently, the fee is 4.248 percent of the loan amount. After Oct. 1, 2019, the loan fee will be 4.236 percent.
Who is responsible for repayment?
Although the loan benefits the student, the loan is in the parent’s name – not the student’s name – so the parent is solely responsible for repaying the loan. Even if the family has an agreement that the student will eventually take over the repayment of the loan, it is a parent loan. The parent’s credit history will be impacted and the parents will be held legally responsible if the loan becomes delinquent.
How does a parent qualify?
The student must complete a Free Application for Federal Student Aid (FAFSA) before a parent can apply for a Direct PLUS Loan. By completing a FAFSA, the U.S. Department of Education knows that the student is eligible to receive federal student loan funds and the parent can receive the PLUS loan to help pay for the student’s education.
Students are also encouraged to complete the FAFSA in order to make sure that they receive any grants or institutional scholarships for which they may be eligible. A student is not required to take out any federal student loans in order for their parents to be eligible for a PLUS loan. No collateral is needed, but a credit check is required.
When does the loan have to be repaid?
Parents are required to start repaying the loan after the loan is fully disbursed to the institution that the student is attending, with the first payment due no more than 60 days later. In most cases, that is shortly after the student’s institution has received the funds. However, parents can request a deferment or other repayment options as needed.
While parents and children may sometimes disagree, one thing is for sure: parents want the very best for their kids – even if it means taking on additional debt. But before taking out a Direct PLUS Loan, parents should make sure that they’ve helped their child obtain as much financial aid (especially grants, scholarships, and forgivable loans) as possible, and that they are not putting their own financial future at risk.
If you’re currently considering a Direct PLUS Loan, or already repaying student loan debt and want assistance understanding your options, consider speaking with one of Money Management International’s trained student loan counselors. They can offer a one-on-one review and analysis of your situation, and give you recommendations based on your unique situation.
If you’ve got a student in your life who aspires to a college education, help them start planning today. If you need additional guidance, visit MappingYourFuture.org for tools and resources to help prepare young students for college and beyond.