Everything You Need to Know About Direct PLUS Loans
Balancing monthly expenses with long-term personal savings goals is hard enough without throwing a pricey college tuition into the mix. If you’re struggling to help your child pay for college, or are a graduate student weighing options for your own loan, the federal government’s Direct PLUS loan program is worth considering.
What Are Direct PLUS Loans?
Direct PLUS loans are meant to pay expenses not covered by other financial aid and charge a higher fixed interest rate than other federal loans available for college costs.
They’re appealing because they don’t have a maximum amount you can borrow, as long as it doesn’t exceed the participating school’s cost of attendance. By the same token, that can spell trouble if you’re tempted to choose one of the more expensive institutions.
There are two loans that fall under the category of Direct PLUS—Grad PLUS and Parent PLUS:
Grad PLUS Loans
These are taken out by graduate or professional students. Like loans in the federal Direct Unsubsidized program, Grad PLUS loans begin accruing interest right away. The attraction, though, is that there is no predetermined limit on what can be borrowed. (Other federal loans available to graduate students are limited to $20,500 per year in most cases.)
The maximum on Grad PLUS Loans is based on the cost of attending your school. You’re eligible to borrow enough to cover the tuition, room and board and other fees minus any other financial aid received.
Parent PLUS Loans
These are taken out by parents or legal guardians for the benefit of their children, who must be dependent undergraduate students. Just like with Grad PLUS, the maximum is based on the cost of attendance, and interest begins accruing right away.
Federal subsidized loans are based on financial need and don’t start charging interest until after students are out of school. These are only available to undergraduate borrowers.
Who Is Eligible?
You’re eligible to apply if you’re a graduate or professional student or the parent of an undergraduate student who is considered dependent. (If the undergraduate himself is going to borrow, he’s eligible for loans in the federal Direct Unsubsidized or Direct Subsidized programs.)
It also makes things easier if you have good credit. Unlike some federal loans, PLUS loans require a credit check. Though there aren’t specific credit score requirements, it’s difficult to qualify if you have an adverse credit history. If you’ve declared bankruptcy or gone into foreclosure within five years of your latest credit report, for example, you’ll need to get an endorser (similar to a cosigner) with good credit history to sign for the loan or show extenuating circumstances.
Rates and Fees
The fixed interest rate for Direct PLUS loans distributed between July 1, 2019 and July 1, 2020 is 7.08%. (For comparison, the rate on Direct Unsubsidized loans is 6.08% for graduate student borrowers and 4.53% for undergraduate student borrowers.)
Both Parent and Grad PLUS Loans also require an origination fee payable upon taking out the loan. For loans made before Oct. 1, 2019, the fee is 4.248% of your loan amount, and for those made between Oct. 1, 2019 and Oct. 1, 2020, it’s 4.236%.
Is a Direct PLUS Loan Right for You?
You can borrow as much as needed to fully cover the cost of attendance.
There is certainty in a fixed interest rate. (Private loans may carry a variable rate.)
There may be federal repayment plan options (such as income-based repayment) that are not available with private loans.
You may find a lower interest rate with a private loan.
You have to pay an origination fee, unlike with some private loans.
Interest begins accruing while the student is still in school.
The first step in receiving any federal student loan is filling out the Free Assessment for Federal Student Aid (FAFSA). Once you’ve done that, your school will send you a financial aid offer letter that enumerates the scholarships, grants and loans you’re eligible for. If you decide a Direct PLUS Loan is right for you, follow these steps to apply:
1. Check your school’s requirements
Most schools will have you apply through the Federal Student Aid website although some have additional requirements.
2. Get your affairs in order and then fill out the application
The application is relatively simple (takes an estimated 20 minutes), especially if you’ve got all your information at hand. (If you’ve put a freeze on any of your credit reports, make sure to lift it.)
3. Sign, seal and deliver
Before you can receive a loan, you’ll need to sign a Master Promissory Note, and sign up for financial guidance counseling if it’s your first time borrowing.
For Parent PLUS loans, if you’d like to defer repayment while your child is in school, you must mark it on the application. Otherwise, you have to start making payments while in school. Interest will still accrue during that time, though you can allow the interest to be added to your principal for repayment later.
Alternatives to Direct PLUS Loans
Taking out a federal student loan isn’t the only way to pay for college. In fact, if you can avoid borrowing altogether, you won’t have to add interest and fees to the cost of education.
Here are some options if you are trying to minimize borrowing or don’t qualify for a Direct PLUS Loan:
- Shop around for private loans: Look online to compare rates and terms before you settle on one. When getting quotes, make sure you use lender sites that say applying won’t affect your credit score.
- Apply for grants or scholarships: Don’t be shy to apply even if you think you don’t have a chance. Investigate to find local, niche scholarships that might be tailored to your experience.
- Defer attendance: Depending on your situation, it might be possible to defer your attendance and work for a year to improve your credit and earn more money.