If you have a child heading to college, it would be wise to familiarize yourself with Parent PLUS Student Loans. These financial instruments may be a great help to you as you struggle to pay for your child’s education, but they may also cause unexpected financial troubles. When dealing with these loans, a little knowledge goes a long way.
Parent PLUS Student Loans are federally guaranteed loans offered to parents to help pay for tuition and fees for their children. If approved, and most people without major financial infractions in their recent past will be, you will be able to borrow the entire out of pocket expense for your kid’s education.
The interest rate for these loans is market-based, meaning that they do fluctuate, though the rate will be locked in at the time of issue. They offer free insurance that cancels the entirety of the remaining debt should the student die or become disabled before you finish repaying the loan.
The financial aid offices of most educational institutions will provide you with an Award Letter (after filling out the FAFSA) that will identify the funds available to your child through scholarships and grants. The manner in which the Parent PLUS loan presents may seem misleading, as it usually is listed along with scholarships and grants that do not require repayment.
However, the PLUS loan is just that: a loan. It is expected to be paid back in full, along with accrued interest. Just because these appear on the Award Letter doesn’t mean that you can afford them. You have been approved, and almost all parents are. However, you will be incurring a substantial monthly bill if you take out this loan. As a general rule of thumb, you can safely expect to pay $120 a month for each $10,000 borrowed.
Should you become unemployed or face some other unexpected form of financial hardship, PLUS loans do offer forbearance or payment deferments. Keep in mind that you will continue to accrue interest during these periods, and when you resume payments, you will be facing a more substantial sum to pay down.
It is also important to remember that student loans, even PLUS loans offered to parents, are not eligible for bankruptcy. Should you file for bankruptcy, you will still be expected to repay your PLUS loan in full.
Additionally, it is important to note that you cannot later transfer these loans. Many parents will enter an agreement with their children that they will pay the cost of student loans until their child becomes financially stable, at which point the child will assume the payments. PLUS loans cannot be transferred, meaning that they will always be in your name. The only way around this would be through private loan consolidation, which removes all of the federal protections provided by PLUS loans.
Parent PLUS loans will affect your credit in the same way as other loans do. Be sure you can afford this option before taking it on because like other loans, late payments can severely damage your credit score.
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