What Are Parent PLUS Loans?
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What Are the Differences Between a Federal Student Loan and a Parent PLUS Loan?
If you’re reading this, I assume you’re already aware that the 2020 U.S. presidential election is just around the corner. If not, then you should be! It seems like just yesterday that we were celebrating the beginning of a new century, and now we’re just over a month away from the next election. In just over a month, we’ll have our next president. Is your vote already cast? Are you sure? I wouldn’t be surprised if you’re not. There’s so much to know about the 2020 U.S. presidential election. From the Democratic candidates to the Republican candidates, it’s enough to make your head spin. But if you want to be prepared for whatever news comes your way, then you should probably brush up on your general knowledge of U.S. politics. And what better way to do that than through a review of U.S. history? Let’s begin our review of U.S. history with an examination of the 2000 U.S. presidential election. You may be familiar with this election in particular since it was the first time that the U.S. had ever been put into a state of emergency regarding an election. The election was so close that the Supreme Court had to intervene and settle the matter once and for all. The court ruled that Florida’s controversial “butterfly ballot” system that was used in the election was indeed, unconstitutional, and that it had to be reformed. So we were all treated to a somewhat confusing electoral round in which the candidates were all competing for the same ballot choice. But that’s how it works in a democracy. We’re all entitled to our own opinions, but when it comes to the matter of elections, we must respect the fact that they’re not about us, but instead, about representing the voters in our country. So even though we may not have liked the outcome of the 2000 U.S. presidential election, we had to respect the fact that it was a fairly close election. And that’s what democracy looks like. This is a good segue into discussing the topic of parent PLUS loans for higher education. If you’re here, you’re almost certainly already aware that there is more than one type of student loan out there. Besides the common and widely-recognized federal student loans, there is also the lesser-known parent PLUS loan. As the name suggests, a parent PLUS loan is any loan that’s guaranteed by the government and offered directly to individuals by banks and credit card companies. But what exactly are the differences between a federal student loan and a parent PLUS loan? Let’s take a look. 1. Interest Rates Federal student loans have variable interest rates that change periodically. Generally, these interest rates are set by the federal government and they are very low compared to most other forms of consumer debt. For an out-of-state public student loan, the rate changes depending on the month and is in the range of 4.9% to 6% APR. For an in-state public student loan, the rate changes depending on the state and is in the range of 3% to 5.6% APR. Most private student loans have even lower rates, in the 2% to 3.5% APR range. But even still, these rates are much higher than what we typically see for credit cards. Now, if your child is going to school far from home, then the variable rate for the out-of-state public student loan may not be so bad. But if you’re closer to home, then you’re probably looking at a fixed interest rate that you have to contend with. This is why it’s generally better to opt for a parent PLUS loan than a federal student loan if you can help it. 2. Loan Limits Federal student loans come with fixed loan limits, which means you’ll never have to worry about paying back more than you can afford. Most parent PLUS loans also have fixed loan limits, so there’s no need to be afraid of going over the credit limit. You’ll never have to worry about paying back more than you can afford. However, if your income is above a certain limit, then you may have to look into getting a cosigner on the loan. A cosigner is someone who has agreed to pay back a portion of the loan in case you default. The maximum loan amount that you could get without a cosigner is usually about twice your income. For example, if your income is $25,000, then the loan amount that you could get without a cosigner is $50,000. The advantage of getting a loan with a fixed limit is that you don’t have to worry about going over it. Even if you have a hefty spending habit, you’ll know exactly how much you can afford to spend on school-related expenses every month. 3. Graduation Requirement Federal student loans have a minimum graduation requirement of 120 credit hours. If you miss a payment or default on a loan, then you’ll have to start paying back the loan principal and interest immediately. Many schools now expect students to graduate with more than 120 credit hours, especially if they want to continue studying in that field. If your kid is going to school far from home and doesn’t have a local high school to attend, then the graduation requirement for the federal student loan could be a bit much to handle. The good thing about the 120 credit hour minimum is that it gives you some breathing room if your child ends up taking a bit more time to graduate than anticipated. 4. Fee Waiver You won’t have to worry about paying fees for your child’s school registration or student loans. The federal student loan program is fully funded by the government, so there are no registration fees or loan fees to worry about. Similarly, most private student loans don’t have any fees associated with them. However, if you do opt for a private loan, then you’ll have to pay the bank or credit card company to process the loan. 5. Grace Period For a federal student loan, there is no grace period. Once you’ve missed a payment or defaulted on a loan, then the IRS will automatically collect interest from your bank account and send you a bill. Some people opt to waive the five-year grace period for mortgages and credit cards, but as luck would have it, the grace period for student loans is forever. 6. Borrowing For a federal student loan, you can only apply for what’s known as “direct loans.” This type of loan prevents you from having to apply for credit cards or mortgage loans, which you may already be burdened with as it is. In order to get a direct loan, you must have either an FSA, an HSA, or a Simple IRA. These are all government-sponsored accounts that you can use to borrow money for education. The nice thing about these accounts is that they don’t require a lot of paperwork and you can set up automatic monthly withdrawals from them to cover your student loan payments. If you don’t have an FSA, HSA, or Simple IRA, then you’re out of luck and will have to look into getting a cosigner for a loan or applying for an unsubsidized loan through a bank.
There, now you know the basics of what a federal student loan and a parent PLUS loan are. Now that you know the differences, it’s easier to understand why one would be preferable to the other. Bear in mind though, that it depends on your personal situation which one you would opt for. As I mentioned above, if you’re closer to home then you might prefer a parent PLUS loan since you won’t have to worry about the interest rates or loan limits. But if you’re living in a house far from home then a federal student loan is the way to go. Hopefully, this article will help you make the right choice for your own personal situation.
If you’re reading this, I assume you’re either a parent seeking a loan for your child’s education or are in the process of qualifying for one. I’m also assuming you’re interested in the federal Parent PLUS loan, since they’re one of the few loans designed specifically for your situation. In this article, we’ll discuss the requirements and what you should know about the loan, how it works, and whether or not you should take it. Let’s get started.
Overall Eligibility Requirements
The overall eligibility requirements for the Parent PLUS loan are similar to those of other loans, such as the Federal Direct or Stafford Loans. To be eligible for the loan, you must:
- Be employed with a monthly income of at least $1,000
- Have a stable income
- Have a child (or other dependent) who will need financial support graduating from an undergraduate school
- Be a U.S. citizen or permanent resident
- Have reasonable assurance you’ll be able to pay off the loan
- Live in the United States
- Have been living in the U.S for at least three years
These requirements ensure that the government will only lend you money if they believe you will be able to pay it back with interest. The government offers several different student loans designed with the college graduate in mind, so be sure to consider all of your options. With Gradual Repayment or Income-Based Repayment, you may be able to lower your monthly payments so you can afford to give your child the college education they deserve.
Special Rules For Parents
Many loans, including the Parent PLUS loan, have special rules for parents. These rules are in place to ensure that the student isn’t forced to choose between paying off their student loans or having enough money for food, shelter, and other necessities. To qualify for the special rules, you must:
- Be the parent of a dependent student
- Agree to a life-time debt obligation
- Necessitate additional financial support for your child
- Want to repay the loan as quickly as possible
- Live in the United States
- Can show you’re trying to pay it back as quickly as possible
- Be able to prove your child is dependent
- Be able to prove you’re a parent
- Have never been convicted of a felony or domestic violence
- Have a credit score of at least 600
If you meet the requirements, you’ll receive numerous benefits including:
- Loan forgiveness for as long as your child is enrolled in an undergraduate program
- Special rate of interest for the life of the loan
- No private student loan repayment fees
- Additional funds to help with extra expenses
The Parent PLUS loan even offers a tax benefit to help reduce your taxable income. If you’re eligible, you should absolutely take this loan and be sure to apply as soon as possible. If you have any questions, be sure to ask them of your loan officer, since they’re the best source of information on this subject.
Who May Qualify For The Loan?
The primary audience for the Parent PLUS loan are parents who are in the process of paying for their child’s education. However, since the criteria are fairly lenient, it’s certainly open to a wider audience. Just about anyone in a similar situation may qualify for this loan, including grandparents, aunts, and uncles.
Even if you aren’t directly related to the student, you may still qualify for the loan if you demonstrate the necessary financial dependence. For example, say you’re the legal guardian of the student but need some help paying for their education. You could apply for the loan as their legal guardian.
How Much Funding Does The Government Provide?
The good news is the government provides a substantial amount of funding for the Parent PLUS loan. The exact amount varies depending on your child’s school, but it’s generally in the neighborhood of $500 to $1,000 per month. While this may not seem like a lot, it can make a world of difference when you’re tight on cash. Just imagine how much more comfortable you’ll feel knowing you have some extra money each month to help with your child’s education.
What Type Of Loans Does The Government Offer?
The government offers several different types of loans for students, including the Parent PLUS loan. These different types of loans allow the government to offer more tailored solutions for various situations. Some of the other more popular loans include:
- The Direct loan, which provides low-interest financing for students and allows for more flexible payment options.
- The Gradual Repayment loan, which allows the student to make payments over a period of time and is very popular with borrowers seeking a loan for their children’s education.
- The Stafford loan, which provides low-interest loans to students, and allows for the payment of scholarships and student employment.
- The PLUS loan, which provides loans for students enrolled in certain private colleges and universities. This loan is typically applied for and given to parents to help with tuition and living expenses.
These types of loans provide borrowers with several perks, including:
- More flexibility in terms of the timing of payments, since the government is not going to aggressively pursue you for non-payment.
- Option to pay over time, rather than all at once. This allows borrowers to spread the cost of their education over a period of time, which many find convenient as they struggle to make ends meet.
- Some companies and organizations provide scholarships for students. If you’re eligible for a scholarship but don’t want to take out a loan, this may be the option for you.
- The ability to use your credit score to obtain satisfactory rates of interest and loan terms
- And last but not least, the possibility of getting a tax benefit for paying back a student loan (subject to certain conditions).
The Pros And Cons Of This Loan
This loan certainly has its perks, but it’s also not without its cons. The primary con (in my opinion) is that the government requires you to agree to a life-time debt obligation. It’s one thing to agree to help out financially with your child’s education, but it’s another thing to sign up for a debt that you may or may not be able to pay back.
Other than that, the Pros far outweigh the Cons, and for a good reason: this loan allows the student to focus on their studies without having to worry about paying off loans or finding the money to cover the basics (food, shelter, and education). As long as you remain committed to helping your child with their studies, this loan can be a great solution. Just make sure you understand the terms and conditions before you make a commitment.
If you’re a parent and you’re looking to finance your child’s future education, you’ll quickly learn that the world of student loans is a whole different ballgame. Your traditional options for borrowing – like a home equity loan or a credit card – don’t work for parents. But that doesn’t mean you have to stay away from financial aid forever. There are still some options available to you beyond the obvious federal and private loans.
The Parent PLUS Loan
Thanks to a partnership between EdFunds and BizEaze, you can get a PLUS Loan for your child’s post-secondary education. The benefit of this type of loan is that it has much more generous limits than your average student loan. While you may only be able to afford to pay for your child’s basic needs, a PLUS loan allows for some discretionary spending, such as books and travel to and from school. The limitation is that you’re still responsible for paying off the loan after your child graduates, so it’s not a long-term secure solution. But for those looking for a short-term solution, it could be ideal.
The PLUS Loan vs. The Private Loan
If you’re deciding to go the private loan route, you’ll need to determine how much you can afford to spend based on your income and current savings. The biggest difference between a PLUS loan and a private loan is that with the latter, your payments are not tax-deductible. You’ll also want to take into consideration the fact that private loans typically have higher interest rates than PLUS loans. When it comes to the total amount of money you can borrow for your child’s education, the latter will usually give you more options and flexibility.
Other Types of Loans
Depending on your situation, you may also want to consider an SBA Loan, a Rehab Loan, a Bridge Loan, or an IDEAL Loan. These are just a few of the many different types of student loans available today. While they may not be as convenient to get as a PLUS or private loan, they may offer you a much better deal based on your income and financial needs. Do your research and see which one works best for you.