What is a Parent PLUS loan and how does it work?

By Citizens Staff

Are you interested in taking out a student loan to help cover your child’s college education? Then you may have heard of the Parent PLUS loan.

Before we dive into the pros and cons of the federal Direct PLUS loan — also known as a Parent PLUS loan — let’s start off with a simple definition. The Parent PLUS loan is a federal student loan parents can take out through the federal Direct Loan program. (The “PLUS” in Parent PLUS stands for Parent Loan for Undergraduate Students.) It’s one option parents have to fill in any college funding gaps that grants, scholarships, work-study, college savings, or payment plans can’t cover, without their child having to take out the entire difference with a student loan in their name.

The Parent PLUS loan offers one standard fixed interest rate for all applicants.

Yes, the Parent PLUS loan is an option. But is it the best one for you? That depends. For some, private parent student loans make more sense.

Check out the pros and cons of the Parent PLUS loan so you can make the best financial decision for your family’s situation.

What are the pros of the Parent PLUS loan?

Let’s start with the good.

Credit requirements for Parent PLUS loans are incredibly light. That can be good news if you’re not getting approved by private lenders but really want to lessen or eliminate the amount your child needs to take out in a student loan in their own name.

Additionally, the Parent PLUS loan has more flexible forbearance options than those of a private parent loan. Forbearance is available on Parent PLUS loans for up to three years; some private parent loan options, like those available from Citizens, offer forbearance for up to 12 months. (Note: Student loans in forbearance accrue interest, which will be capitalized, which means it is added to your loan balance when you resume repayment.)

Furthermore, the process of applying for Parent PLUS loans is typically quicker than applying for a private parent loan since the requirements for approval are much lighter.

What are the cons of the Parent PLUS loan?

Now for the not-so-good.

As mentioned earlier, the Parent PLUS loan has a standard fixed interest rate for all applicants. That means everyone — parents with great credit and those with not-so-great credit — gets the same interest rate. What if you could do better?

Note: Before taking out a Parent PLUS loan, make sure it’s the right option to help your child without hindering your ability to reach future financial goals.

Private student lenders determine your interest rate based on your creditworthiness. So if your credit is in good standing and you’re approved, you might be able to get a better interest rate with a private parent loan than the federal Parent PLUS loan. Plus, private parent loans give you the option of choosing either a fixed or variable interest rate; Parent PLUS loans only offer fixed interest rates.

One of the biggest differences is that Parent PLUS loans charge what’s called an origination fee for processing and disbursing the loan. The origination fee on a Parent PLUS loan is 4.2% of the loan amount, which can either be taken out of the amount that’ll end up being disbursed or added onto the loan amount and thus be charged interest over the life of the loan.

For example, if you took out a $40,000 Parent PLUS loan, the 4.2% origination fee would total $1,600. At this point, you have two choices:

1. Only get disbursed $38,400, but be responsible for paying back principal and interest on $40,000
2. Get disbursed the original $40,000, but be responsible for paying back principal and interest on $41,600

Private lenders, like Citizens, don’t charge an origination fee on private parent loans, which can save you thousands of dollars compared to Parent PLUS loans

Lastly, since the credit requirements for the Parent PLUS loan are so light, it means that some parents will get approved for and take out a Parent PLUS loan who aren’t equipped to repay it. Parents will take out the loan anyway since they want to help their child, but when it comes time to repay, they struggle immensely to make their monthly payments, which is why the government charges the origination fee.

Meanwhile, private parent student loans have stricter credit requirements to get approved and therefore only approve applicants whom the lender believes can repay the loan. Most borrowers repay their private loan. That’s how lenders can afford to not charge an origination fees.

Be careful of the Parent PLUS loan

When your child is accepted to a college, they’ll receive a financial aid award letter soon thereafter. That award letter will call out the school’s cost of attendance, as well as all financial aid your child is eligible to receive.

That’s all good, right? Yes — unless that college lists the Parent PLUS loan as financial aid, implying that it’s an award, not a loan that needs to be repaid. Some colleges do this, so be extra careful when reading your child’s financial aid award letter so you’re not misled into thinking the school is more affordable than it really is.

What to remember

The fact that you want to take on a student loan for the sake of your child is noble. Just make sure you choose the right parent student loan so you’re not locked into a loan that isn’t right for you.

For some, the Parent PLUS loan will be the best option. For others, a private parent loan makes more sense. Give yourself enough time to research both choices so you can find the best fit for you.

Ready to help your child fund their college education?

A Citizens Student Loan® for Parents allows you to manage up to 100% of your child’s college costs without sacrificing your future.