With the increasing cost of education in recent years students who have relied on traditional Stafford loans have frequently discovered that they fail to cover most of their expenses. The PLUS program (Parent Loans for Undergraduate Students) was therefore introduced and is intended to assist in closing the gap between the funds available from college loans and the actual cost of education.
Despite the fact that the interest rate is higher than other loans the limit on borrowing is a great deal more flexible and the loans are not need-based.
For the FFEL program (Federal Family Education Loan) in which funds are provided by private lenders the interest rate is presently 8.5% and loans provided by the US Department of Education under the Direct loan program are presently charged at 7.9%. This difference of just 0.6% might appear insignificant but can prove very significant when viewed over the lifetime of an average loan.
With PLUS loans parents are permitted to borrow up to the full cost of a child's education minus the amount of any financial aid that the child is awarded. Though PLUS loans are not cheap they can often make a difference when deciding which college to attend or indeed whether or not to attend at all.
However, because PLUS loans are not based upon need, they do need a credit check before approval. Normally it is the parent's rather than the student's credit that is checked since the parent is the signatory to the promissory note and is responsible for meeting repayments on the loan.
Where the parent's credit history makes him or her ineligible for a PLUS loan a co-signer can participate in the loan and a relative or other third party can guarantee the loan repayment and assume legal responsibility as a co-borrower. With recent difficulties in the area of sub-prime borrowing however such cases are unfortunately more common than they have been. That means that in borderline cases the requirement for a co-signer is increasingly likely.
Aside from changes in interest rates another recent alteration to the program is its extension to permit graduate and professional students to qualify for PLUS loans. Identical eligibility criteria and interest rates apply and they must be studying at a suitable institution and on an eligible program.
Different from many college loan programs, repayments on PLUS loans starts right away and the initial payment is normally required within 30 to 60 days after the loan funds are disbursed. Interest starts to build up from the time the first payment is drawn down and both interest and principal needs to be paid in regular monthly installments while the student is in college. Payments need to be made to the specific lender in the case of FFEL loans and to a US Department of Education servicing center for Direct loans.
Make sure that you work out the costs of obtaining a PLUS loan very carefully and look on it as a loan of last resort. Even something like a home equity loan may turn out to be cheaper because the interest payments are tax-deductible.
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