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Should you take out Parent PLUS Loans?

Have you heard of Parent PLUS Loans? Have you heard that there are some major pros and some major cons before you consider taking them out? So, if you’re an undergrad student or the parent of an undergrad student, this show is for you. 

Hello everyone thanks for tuning into another special Friday episode of Ask Abby, I’m Abby, and we are finishing up our student loan series to talk about Parent PLUS Loans. What are they? When should you take them out? And what are the advantages and disadvantages of doing so both in the short-term and long-term. If you’re a parent or student and you need some financial aid for the upcoming college years ahead, make sure you ask me questions and watch the rest of this video to get info on exactly what you should know about Parent PLUS Loans. 

First things first, what is a Parent PLUS Loan? It’s a direct federal loan that parents of undergrads can take out to help their kids pay for school. To get the loan, your school has to A. Participate in the Direct Loan program, and B. you have filled out the FAFSA form. Those are the two major qualifiers, but we will talk about a few others as well. 

For example, to qualify for the Parent PLUS Loan, parents have to have a decent credit history. What does that mean? Well, you can’t have any late payments over 90 days on accounts with more than $2000. And if you’ve gone through bankruptcy, repossessions, foreclosure, wage garnishment, had default or charged off accounts, or a tax lien in the last five years, you won’t qualify for the loans. Now, parents, if you do have one or more of these flags on your credit report, you can still potentially take out the loan by obtaining an endorser. Which basically means someone agrees to pay for the loan if you do not. 

Now, let’s talk about interest rates. The interest rate for these loans change every year but once you take out the loan, the interest rate is fixed, meaning that it’ll never go up or down – unless there’s a weird coincidence like the COVID-19 pandemic and interest rates are reduced to 0% like they are right now, but we’ll get into that more later. Anyways, this year’s interest rate for PLUS loans is locked in at 5.3% so if you take out a PLUS loan between now and July 1 of next year, you will pay that interest rate on it. 

Another simple qualifier is that the student has to be enrolled at least half-time. Easy enough, right? 

So, let’s just quickly chat through some major bullet point for these loans, like who is responsible for paying them back, when does repayment start, etc. etc. 

First question, who is responsible for paying them back? Well, the loan is technically under the parent’s name. Unless you decide to refinance and change the name to reflect the student’s. If you’re ready to do that, I’m quickly going to put in a video about student loan refis in the comment bar, so check that out… 

So, parents, this is your loan. You’re responsible for paying it back. When? As soon as the funds have been disbursed. Unlike some other types of federal loans, these payments are not deferred until graduation, so you’ll get info on repayment from your loan servicer as soon as your child gets their money. 

Now that we’ve got some of the basics out of the way, let’s dive into some pros and cons.

One of the biggest pros of this is that you can borrow as much as you need up to the entire cost of attendance. That makes it easy to get what you need to pay for school in one application process. 

But, let’s talk about the con that goes along with that. Like I said, repayment on these doesn’t start after graduation. They start after disbursement. So the bigger the loan, the higher your monthly payment will be, like soon. So, my advice? If you have the option of taking ANY other federal aid though, take that first.

Another pro, is that you have more options for repayment and assistance if you need it, just because of the nature of federal loans. Private loans can get tricky if you run into financial trouble. Some lenders allow you a deferment or forbearance but usually not more than 3 months at a time. And, unless you refinance, there’s not really an option to adjust your monthly payment. With this type of loan though, there are a variety of repayment options. So, whether you want to stick with the standard, where you pay the same monthly payment for ten years, or a graduated payment, where you pay less at first and then the monthly payment gradually increases, those are both options. There is also an option to extend your repayment to 25 years, which would lower your payment significantly and lastly, the income-contingent repayment, which means you would consolidate your PLUS loan into a Direct consolidation loan, which would allow you to pay 20% of your income or what you’d pay on a standard 12-year plan, whichever is lower. That’s a major benefit. In the case of private students loans, you usually have a standard, fixed monthly payment, period. 

A con to all of that though is the interest rate itself. While there are more benefits on the federal level, if you’re financially stable and have good credit, you might actually find a better interest rate with a private lender. Plus, Parent PLUS loans come with an origination fee, which means they take out a percentage of your funds before disbursing it. That fee is usually between 4-6%. So, just make sure you shop around before committing to anything. 

So, Parent PLUS Loans. A lot to consider, right? If you need help navigating the world of student loans, ask me questions on FB, email me at askabby@creditanddebt.org, call our coaches, and make sure to go back and watch my other videos that I did throughout this student loan series. We’ve covered everything from student loan refis, to building your credit while in college and even tips if you’re having a hard time making your payments due to the pandemic. 

Plus, you guys be sure to like our page and opt-in for live notifications BECAUSE there’s a new stimulus bill out there and whether or not when some of the relief and aid gets distributed in still up in the air, so I’m keeping an eye out and I will update you as soon as there’s solid information.

That’s it for today’s show and that finishes up our student loan series. If you have questions that didn’t get answered, please don’t hesitate to reach out. We will start a brand new series next week so make sure to keep an eye for that! I will see you all next time on Ask Abby! 

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