In pre-pandemic times, the end of March marked a significant milestone for the college-bound, as most universities aimed to deliver their regular admission decisions to thousands of anxious students. And yet even the college admissions cycle was not immune to the impact of COVID-19, as many colleges extended their regular decision deadline.
Coupled with the fact that the latest economic stimulus package included major changes to the federal student aid process, the path toward a college education may look very different for the class of 2025 and their families. Critics of the legislation argue that replacing the Expected Family Contribution (EFC) with the Student Aid Index (SAI) will significantly reduce the amount of financial aid for middle- and high-income families who have multiple students enrolled in college at the same time.
Considering the unexpected and sudden change in aid qualifications, many families will likely need to seek additional sources of funding to foot the bill for higher education. For anyone with dependents who are approaching college age, now is definitely a good time to consider a crash course on Parent Plus Loans.
You’ll want to study up on the ins and outs of Parent Plus Loans, as you would with any major financial decision, as well as understand how they could impact your other financial priorities and goals. But to get you started, here’s a look at some of the fundamentals.
Parent PLUS Loans
The office of Federal Student Aid offers Parent PLUS Loans to parents borrowing on behalf of their student. Parents can borrow up to the full cost of attendance of their child’s school minus any financial aid their child has already received. Parent PLUS Loans require the borrower to pass a credit check, which must be free of any adverse credit history.
Unlike other federal student loans, Parent PLUS Loans carry the added expense of an origination fee. As of Oct. 1, 2020, all Parent PLUS Loans come with an origination fee of 4.228%. For example, if a parent borrowed $50,000, they would pay an origination fee of $2,114.00. The additional fee is built into the principal of the loan.
Last, but certainly not least, unlike student-borrower loans, which do not require payments until six months after graduation, the repayment of Parent PLUS Loans commences immediately. While it’s possible to apply for loan deferment while a student attends school, interest continues to accrue on Parent PLUS Loans even if formal payments are paused.
Understanding interest rates
Borrowers who took out new Parent PLUS Loans after July 1, 2020, received the historically low interest rate of 5.3%, a staunch drop from the interest rate of 7.08% offered the previous year. While these interest rates come as a welcome opportunity for new borrowers, they do not apply to private student loans or any existing federal student loans.
Federal student loan interest rates for the upcoming school year are determined by the government. The rate is calculated using the 10-year Treasury note auction, plus an additional varying percentage subject to the type of loan and if the loan is made to an undergraduate or graduate student. The low 5.3% rate applies to new federal student loans made between July 1, 2020, and June 30, 2021.
Importantly, federal student loan interest rates are fixed for the life of the loan at the time and rate at which you take them out. Unlike traditional loans, such as a mortgage or car loan, which are eligible for refinancing to a lower interest rate with (relative) ease, this is not the case with Parent Plus Loans.
Without a federal option to refinance, Parent PLUS Loan holders might be tempted to turn to a private loan to refinance, the carrot being the possibility of getting a lower interest rate. But consider a cost-benefit analysis before pursuing this option. The trade-offs with private loans involve lost protections, like payment suspension during the pandemic and income-based repayment plans. Including Parent PLUS Loans in proposed plans to cancel student loan debt is an issue still up for debate.
Federal Parent PLUS Loans cannot be transferred to the student
Federal Parent PLUS Loans cannot be transferred to the student. A parent borrowing for the benefit of a child’s education is solely and legally responsible to repay the loan. That being said, parents do have the option to consolidate Parent PLUS Loans into a direct federal loan or to refinance the Parent PLUS Loan into a private loan in the child’s name once they can meet the qualifications. (If the student does not qualify, co-signing a private refinancing loan is also an option to meet the lender’s co-signer release requirements.) Refinancing federal loans to private loans in the student’s name will eliminate the ability to use income-driven repayment plans and loan forgiveness programs.
Consolidated federal Parent PLUS Loans are limited to certain types of repayment plans and forgiveness
While borrowers are assigned a plan at the start of the repayment term (immediately), they can change repayment plans at any time for no additional cost.
Income-Contingent Repayment is the only income-driven repayment plan that Parent PLUS Loan borrowers can use. To be eligible, borrowers must first consolidate their PLUS Loans into a Direct Consolidation Loan. Income-Contingent Repayment reduces the monthly federal student loan payment to either 20% of discretionary income or the amount you’d pay on a fixed 12-year payment plan, adjusted according to income. The remaining loan balance is forgiven after 25 years if you’re still making payments at that time.
Strict requirements need to be met for Parent PLUS Loan forgiveness
Similar to direct federal student loans, a Parent PLUS Loan may be discharged if the borrower or student dies, if the borrower (not the student for whom the funds were borrowed) becomes totally and permanently disabled, or, in rare cases, if it’s included in bankruptcy. All or a portion of a Parent PLUS Loan may be discharged in a variety of other circumstances.
Parent PLUS Loans qualify for PSLF if they are consolidated
Parent PLUS Loans are eligible for forgiveness under the Public Service Loan Forgiveness (PSLF) program if they are first consolidated with the Federal Direct Consolidation Loan program, meet PSLF program requirements, and borrowers then apply for the forgiveness program. Here’s the catch: Qualification is based on the loan holder’s employment (and a variety of additional requirements), not the student’s employment. Parent PLUS Loan holders employed by a nonprofit, public hospital system, the government, or any of the additional 14 qualifying employer types are eligible based on their own employment regardless of their student’s academic major or post-graduate employment.
Let’s say, for example, that Jane took out Parent PLUS Loans to pay for her child’s undergraduate education. Jane is a social worker and a full-time (30 hours a week) employee at a 501(c)3. Jane, as the borrower, could enroll in and pursue PSLF for her direct Parent PLUS Loan, even if her child, Billy, were to eventually find employment in the private sector or at a small business.
That being said, the rule still applies even if we were to flip Jane and Billy’s employers. For this example, let’s say Jane is still the loan holder but works as the Chief Investment Officer at a private hedge fund company. If Billy pursued a degree in social work and is hired by the same 501(c)3 from the previous example, Jane’s Parent PLUS Loan would not qualify because her employer does not qualify for PSLF.
It’s critically important that households consider federal loan forgiveness programs such as PSLF when determining the owner of a loan. The Consumer Financial Protection Bureau estimates that over one-fourth of employed U.S. citizens qualify for PSLF based on their employer, so it’s worth thinking about if you currently own, or are considering acquiring, Parent PLUS Loans. Still, if a student has a very strong desire to pursue public service, it might be worthwhile for the student to own the loan (and the eventual forgiveness).
Parent PLUS Loans are commonly used to fill a gap between the total annual cost of attending college and a student’s financial aid package. While it’s an enticing quick fix to fully funding the cost of college, also explore other supplements, like work study programs, grants or scholarships.
If your dependent is currently pursuing higher education, call your chosen school’s financial aid office to talk about your financial aid package for next year, especially if a student’s financial situation has recently changed.
Higher education is an investment that requires student and parents alike to be smart about borrowing and to understand all their options. While Parent Plus Loans can be part of a successful strategy, as with all financial decisions, they must be considered on an individual basis in light of what is best for the entire family.
This article originally appeared May 4 on thestreet.com.
The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Partners®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed.
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