This article will explore the pros and cons of taking out a Parent PLUS Loan, helping you make an informed choice.
Paying for college is a significant financial challenge for many families. As tuition fees continue to rise, parents often find themselves looking for ways to support their children’s education without depleting their savings. One option available to parents of dependent undergraduate students in the United States is the Parent PLUS Loan, a federal loan that helps cover the cost of education. While this loan can be a valuable tool in funding a child’s college education, it’s essential to understand both its benefits and potential drawbacks before making a decision.
What is a Parent PLUS Loan?
The Parent PLUS Loan is a federal student loan available to parents of dependent undergraduate students. Unlike other federal student loans, which are typically taken out by the student, the Parent PLUS Loan is in the parent’s name, making them responsible for repayment. The loan covers the cost of attendance (tuition, room and board, books, and other expenses) minus any other financial aid the student receives.
To be eligible for a Parent PLUS Loan, the parent must pass a credit check, and the student must be enrolled at least half-time in an eligible program. The loan offers flexible repayment options and fixed interest rates, which are set by the federal government each year.
Pros of Taking Out a Parent PLUS Loan
- Covers Full Cost of Attendance
One of the most significant advantages of the Parent PLUS Loan is that it can cover the entire cost of attendance, minus any other financial aid the student receives. This means that parents can use the loan to pay for tuition, fees, room and board, books, and other education-related expenses. For families who do not have sufficient savings or who want to avoid depleting their retirement accounts, the Parent PLUS Loan provides a way to fully fund their child’s education.
- Fixed Interest Rate
Parent PLUS Loans have a fixed interest rate, which means that the rate remains the same throughout the life of the loan. This can provide peace of mind to borrowers, as they don’t have to worry about fluctuating interest rates and can plan their finances more effectively. The fixed interest rate is set by the federal government each year and is generally higher than the rates on Direct Subsidised and Unsubsidized Loans but lower than most private loan options.
- Flexible Repayment Options
The Parent PLUS Loan offers several repayment options, giving borrowers flexibility in how they manage their debt. Parents can choose from the Standard Repayment Plan, which involves fixed monthly payments over 10 years; the Graduated Repayment Plan, where payments start low and increase every two years; and the Extended Repayment Plan, which allows for lower monthly payments over 25 years. Additionally, parents can apply for an Income-Contingent Repayment (ICR) plan through consolidation, which adjusts payments based on income and family size.
- No Prepayment Penalty
Parents who take out a Parent PLUS Loan can make extra payments or pay off the loan early without facing any penalties. This is a significant advantage for those who may come into extra money through bonuses, tax refunds, or other means and want to reduce their debt more quickly. By paying off the loan early, parents can save on interest costs and reduce the overall burden of the loan.
- Deferment and Forbearance Options
Parent PLUS Loan borrowers have access to deferment and forbearance options, which allow them to temporarily postpone or reduce their loan payments during times of financial hardship. For example, parents can defer payments while the student is enrolled at least half-time and for six months after graduation. Forbearance can also be requested in cases of financial difficulty, though interest will continue to accrue during the deferment or forbearance period.
Cons of Taking Out a Parent PLUS Loan
- High Interest Rate
While the Parent PLUS Loan offers a fixed interest rate, it is typically higher than the rates on other federal student loans, such as Direct Subsidised and Unsubsidized Loans. As of the 2023-2024 academic year, the interest rate for Parent PLUS Loans is 8.05%, which can make the loan more expensive in the long run. The higher interest rate means that parents will pay more over the life of the loan, especially if they choose a longer repayment term.
- Origination Fees
Parent PLUS Loans come with an origination fee, which is deducted from the loan disbursement. For the 2023-2024 academic year, the origination fee is 4.228% of the loan amount. This fee increases the overall cost of borrowing and reduces the amount of money that is actually available to pay for education expenses. For example, if a parent borrows $10,000, they would receive approximately $9,577 after the origination fee is deducted.
- Responsibility for Repayment
The Parent PLUS Loan is taken out in the parent’s name, making them solely responsible for repayment. This means that if the student is unable or unwilling to help repay the loan, the parent is still obligated to make the payments. This can create financial strain, particularly if the parent is nearing retirement or already has other financial obligations.
- Impact on Credit Score
Like any loan, the Parent PLUS Loan will appear on the borrower’s credit report and can impact their credit score. Taking on a significant amount of debt can increase the borrower’s debt-to-income ratio, which could make it more difficult to qualify for other loans or credit in the future. Additionally, missed or late payments can have a negative impact on the borrower’s credit score, making it harder to obtain favourable interest rates on future loans.
- Potential to Delay Retirement
Taking out a Parent PLUS Loan can have long-term financial implications, particularly for parents who are approaching retirement. The loan must be repaid regardless of the parent’s retirement status, and the additional debt could force parents to delay retirement or reduce their retirement savings. It’s important for parents to carefully consider their long-term financial goals before taking on a Parent PLUS Loan, as the burden of repayment could impact their ability to retire comfortably.
Conclusion
The Parent PLUS Loan can be a valuable tool for families looking to finance their child’s college education, but it’s important to weigh the pros and cons before making a decision. While the loan offers the benefits of covering the full cost of attendance, fixed interest rates, and flexible repayment options, it also comes with higher interest rates, origination fees, and the potential for financial strain on the parent.
Parents should carefully consider their financial situation, long-term goals, and the student’s ability to contribute to repayment before taking out a Parent PLUS Loan. In some cases, it may be worth exploring other options, such as private loans, scholarships, or payment plans offered by the college, to find the most affordable way to finance education.
Ultimately, the decision to take out a Parent PLUS Loan should be based on a thorough understanding of the loan’s terms and conditions, as well as a realistic assessment of the family’s ability to repay the loan without compromising their financial security.