What Are PLUS Loans?

What Are PLUS Loans?

PLUS loans are unsubsidized federal loans that help graduate students and parents of undergraduate students pay for tuition, fees, room and board and more. Here's a breakdown of how parent PLUS and grad PLUS loans work:

• Parent PLUS loan: Biological or adoptive parents of dependent students can take out PLUS loans to pay for school costs as long as the student is enrolled at least part time. Parents are responsible for paying off parent PLUS loans and not the student.
• Grad PLUS loan: Graduate and professional students can use grad PLUS loans to pay for graduate or professional-level education that will lead to a certificate or degree. Students must go to school at least part time to qualify. The student is responsible for paying back the debt.

For both types of PLUS loans, the maximum you can borrow is the "cost of attendance" less any other financial aid the student is rewarded. This means that you may qualify for different amounts of PLUS loans at different schools. PLUS loans are unsubsidized, so interest starts accruing immediately after you borrow.

How to Qualify for PLUS Loans

The application process for direct PLUS loans is a bit different from other federal loans. For one, you have to fill out an additional form outside of the Free Application for Federal Student Aid (FAFSA) to request PLUS loans. And unlike other federal loans, a credit check happens during the application, and applicants with adverse credit history may not qualify.

Adverse credit history includes recent delinquency or bankruptcy, repossession, wage garnishments, tax liens or foreclosure on your credit report. However, if you have a poor credit history, you may be able to get approved for PLUS loans by adding an endorser to your application who has good credit history.

Here's how the application process works for PLUS loans:

1. Fill out the FAFSA. If you're a parent taking out PLUS loans for a student, the dependent student should still fill out the FAFSA. Before applying for grad PLUS loans, you should also first complete the FAFSA.
2. Go to StudentAid.gov. The Department of Education has a PLUS loans webpage where you can start the application process.
3. Enter student and borrower information. The PLUS loan application asks for information about the student and borrower. For graduate PLUS loans, the borrower and student information will be the same; for parent PLUS loans they will be different. Then you'll see some loan options, including the choice to borrow the maximum available or a specific loan amount.
4. Get the results. A credit check happens at the end of the application, and you could get one of three responses: accepted, declined or pending. If you're declined because of your credit, you can add an endorser or submit paperwork to explain the reason behind your adverse credit history. If there are special circumstances that led to credit history problems, such as a divorce or identity theft, you may be able to get approved after completing PLUS credit counseling.
5. Sign the promissory note. The final step is signing the master promissory note to confirm your promise to repay the debt.

How to Repay Plus Loans

StudentAid.gov offers three repayment terms for PLUS loans:

• Standard repayment plan: A 10-year repayment term that has fixed payments.
• Graduated repayment plan: Another 10-year repayment term, but payments start out smaller and increase every two years.
• Extended repayment plan: A longer-term repayment plan that gives borrowers with over $30,000 in loans up to 25 years to pay off the debt.

In addition, grad PLUS loans are eligible for all income-driven repayment (IDR) plans that set your payment to a percentage of discretionary income. On the other hand, parent PLUS loans are only eligible for the Income-Contingent Repayment (ICR) plan once consolidated with a direct consolidation loan.

Should You Get a PLUS Loan?

The eligibility criteria for PLUS loans isn't too stringent, but there are still some disadvantages to consider before using them to pay for an education. Here's a breakdown of the good and bad:

Pros

• Versatile loans: If you're a grad student who has maxed out on other aid (or you want to split education costs with your child), PLUS loans offer a way to finance school costs.
• Deferment and forbearance available: Like other federal loans, PLUS loan payments may be deferred while the student is in school and for up to six months after the student leaves school. If you face financial hardship, you might also be able to qualify for forbearance.
• Multiple repayment options: Parent PLUS loans are eligible for the ICR plan after consolidation, and grad PLUS loans may qualify for all income-driven repayment plans.

Cons

• Unsubsidized loans: Borrowers are responsible for paying interest on unsubsidized PLUS loans during periods of deferment and forbearance, and interest starts accruing as soon as you borrow. If you don't make at least interest payments while you or the student is in school, capitalized interest can grow your balance and make it harder to pay off.
• Higher loan fees: PLUS loans have a much higher origination fee than other federal loans. Currently, the upfront fee for PLUS loans is 4.228% compared with 1.057% for direct subsidized loans and direct unsubsidized loans.
• Higher loan interest: PLUS loans also have a higher interest rate than other federal loans. Currently, the interest rate for PLUS loans is 7.54%. In comparison, direct loans for undergraduate and graduate students have an interest rate of 4.99% and 6.54%, respectively.

The Bottom Line

Federal loans are generally considered one of the more affordable ways to finance an education, but PLUS loans come with higher fees and interest than other federal loan options, which is important to factor in before borrowing.

Suppose you have good or excellent credit and don't foresee yourself needing federal loan perks, like loan forgiveness or income-driven repayment plans. In that case, it could be worth exploring private student loan options as well. Private student loans could come with lower interest rates, saving you money and helping you pay off debt faster.

Using Experian's comparison tool, you can get personalized private loan offers to compare against PLUS loans to figure out what makes the most financial sense.