Part of being a parent is wanting to protect your children from things that might harm them, including a heavy student debt burden. This is why many parents turn to the Federal Parent Direct PLUS loan program. These loans put the burden of payment squarely on the parent.
PLUS borrowing has grown from a little used option to account for 10% of all federal student loans issued in 2014. The average amount borrowed per student under this program increased from $8,900 in 1989-90 to $27,700 in 2011-12 on an inflation-adjusted basis.
On the Plus Side
PLUS loans were intended to address the funding gap left between the cost of college and the amount of all other aid offered. As a result, they were designed to be easy to qualify for and there are no limits placed on the amount that can be borrowed. Theoretically, they can be used to finance each child’s entire education expense.
The Negative Side
While PLUS loans enable more parents to say “yes” to their children’s first choice, they come with a catch. Approval of these loans does not incorporate any evaluation of their affordability for the family. PLUS loans have higher rates than other programs and interest on these loans starts accruing 60 days after disbursement, though principal payments are deferred until graduation. This can lead to a much larger loan balance by the time repayment begins.
Students can borrow more cheaply and with better terms in their own names through other federal programs. This is why it is typically a better financial move for students to borrow the maximum amount they can in federal student loans, and have their parents help them with the payments when repayment begins after graduation. Student loans also face more flexible repayment options, including the opportunity for reduction or forgiveness through teacher or public service programs. For parents, however, even bankruptcy will not protect them from PLUS loan repayment…only death.
Before applying for a PLUS loan, talk through your family’s funding options with a NFCC certified financial professional. They may be able to help you structure a cheaper plan at a lower rate with repayment levels that are far more budget-friendly.
Drew Kessler is Vice President of Marketing & Communications with the National Foundation for Credit Counseling.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.