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Parent Plus Loans: What They Are and Why They May be Better Than a Private Student Loan

May 14, 2020

What is a Parent Plus Loan

A Parent Plus loan is a federal student loan that parents can borrow on behalf of their children who are undergraduate students. You can borrow a Direct Plus Loan if you’re the parent or adoptive parent of a dependent undergraduate student attending college at least half-time.

Unlike a private student loan, a Parent Plus loan isn’t based on your credit score or your finances. The Department of Education only cares about whether you have an adverse credit history.

You have an adverse credit history if, during the past 5 years before a credit check, you have been subject to a:

  • Default determination
  • Discharge of debts in bankruptcy
  • Foreclosure
  • Repossession
  • Tax lien
  • Wage garnishment or
  • Settlement/Cancellation of a financial aid debt.

You can appeal a denial Plus Loan application if you can show extenuating circumstances or can get a cosigner (endorser).

Who is responsible for a Parent Plus Loan

The parent is responsible for the Parent Plus Loan. Although your child may agree to repay the student loan debt, it remains your legal responsibility to repay the debt.

Your child cannot consolidate the debt into her name.

She cannot get a private student loan to refinance the debt in her name.

The only way to transfer the Parent Plus Loan into your child’s name is for your child to borrow a personal loan to pay off the debt.

Are Parent Plus Loans a Good Idea?

Parent Plus Loans are a good idea if you want to avoid or limit your child getting student loan debt in their name. The parent borrower incurs most or all of the student debt and the debt stays with them until they die. It doesn’t follow their spouse or children. It simply goes away.

The bad part about Parent Plus Loans is the loan repayment options suck.

They’re not eligible for the best income-driven repayment plans like REPAYE, PAYE, IBR, etc.

The only income-driven repayment plan a Parent Plus loan is eligible for is the income-contingent repayment plan. Unfortunately, that repayment plan leads to higher monthly payments than your child gets with her Direct Loans.

Related: Repayment and Deferment Options for Federal Student Loans

Is it Better to get a Parent Plus Loan or a Private Student Loan?

The benefits of parent loans are that they have a fixed interest rate and if you become unemployed or disabled, you can get a deferment/forbearance, or maybe even loan forgiveness.

Direct Loans do, however, charge a loan fee. The loan fee is 4.236% of the loan amount. The fee will be deducted from the loan disbursement.

Depending on your credit score and the terms included in the promissory note, a private student loan can be cheaper in the long run — but only if you can get a lower interest rate and the origination fee is low.

One other thing to check when considering whether to get a Parent Plus Loan or a private student loan is how the interest is calculated.

Parent Plus Loans Charge Daily Interest

Direct Loans charge interest daily. This means the interest amounts are added to the loan balance daily. And that can cause your monthly payments to balloon quickly.

Private student loans may charge a daily interest rate or a monthly interest rate or some other type of rate.

SoFi promissory note showing interest accrues monthly.
Copy of SoFi student loan promissory note showing monthly interest

You’d want to check the Master Promissory Note to confirm how interest is being calculated.

In my opinion, depending on your financial stability, a Parent Plus Loan is almost always the better choice. It gives you the most options to adjust when life happens.

What are the Interest Rates for Parent Plus Loans

The Department of Education is offering a 7.08% interest rate for Direct Plus Loans.

How to Lower the Interest Rate

The only way to get a lower interest rate for a Parent Plus Loan is to refinance the loan with a private lender.

A consolidation loan won’t help.

Consolidation doesn’t lower the Plus Loan interest rate. It uses the weighted average of the interest rate for all the federal student loans you’re consolidating to calculate your new Plus Loan interest rate.

Because of that, the only way you’ll get a lower interest rate is to refinance with a private lender.

Parent Plus Loan Forgiveness

As the parent, you can get your Parent Plus Loan forgiven if you’re totally and permanently disabled or you work for a public service employer.

Your loan will not be forgiven if your child becomes disabled or if they work for a qualifying public service employer.

Read Full Article: The 2 Best Options for Parent Plus Loan Forgiveness

Again, the loan is yours. So its forgiveness options are tied to what happens to you as the Plus Loan borrower and what you do.

Bottom Line

When evaluating loan options, a Parent Plus Loan can be a good choice for you as the parent to carry the responsibility for your child’s education expenses.

They offer a repayment plan based on your income and potential loan forgiveness.

​But they come at a cost – high-interest rates and loan fees.

Before signing the MPN, look at your other loan options. See if you can save money with a private student loan.

 

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