With the cost of college continually on the rise, few students can cover tuition and expenses without taking out student loans. According to the Urban Institute, 70% of those with a bachelor’s degree have student debt.
And though only 15% of all students go on to graduate school, 40% of the country’s total yearly student debt belongs to grad students, according to the Center for American Progress.
And if federal direct loans aren’t enough to cover the entire cost of attendance, federal direct parent and grad PLUS loans allow you to borrow everything you need.
But before you sign for that loan, it pays to know what you’re borrowing.
What Is a PLUS Loan?
A federal direct PLUS loan is a government-backed student loan offered through the U.S. Department of Education (ED). It’s available to the parents of undergraduate students as well as directly to graduate and professional students.
The “PLUS” used to stand for “parent loan for undergraduate students.” The original purpose of the program was to enable parents to help finance their children’s educations. But today, there are two types of PLUS loans: the parent PLUS loan and the grad PLUS loan.
The grad PLUS loan first became available on July 1, 2006, through an amendment to the parent PLUS loan program. Hence, the acronym has remained unchanged, although the program is no longer limited to parents of undergraduate students.
Regardless of whose name is on the loan, both forms of PLUS loan have several things in common.
PLUS Loans Have No Borrowing Cap
The purpose of PLUS loans is to cover any financial gaps left by other forms of financial aid, including grants, scholarships, and other federal student loans. Before borrowing PLUS loans, students first max out the borrowing caps on their federal direct loans.
The ED allows undergraduate students to borrow between $5,500 and $12,500 per year in direct loans, depending on their year in school and their status as a dependent or independent student.
Graduate students can borrow a significantly greater amount of $20,500 per year. But it’s not always enough to cover the total cost of attendance.
It’s no surprise to anyone that getting an education is expensive. And it involves more than just the price of tuition. That’s where PLUS loans come in. PLUS loans allow you to borrow up to the total cost of attendance, an amount calculated by your school.
The cost of attendance is the total amount it costs to get an education at your school. It includes tuition, fees, the cost of books, living expenses like food and housing, necessary equipment and supplies like a computer, study-abroad program costs, and transportation. It can also include expenses like dependent care and disability accommodations for students who need them.
PLUS loans allow you to borrow up to that amount every year, minus any other types of aid you’re receiving. In other words, you can only borrow the difference between the total cost of attendance at your school and the other financial aid you receive in grants, scholarships, and direct loans.
Additionally, there’s no cap on PLUS loan borrowing. While you can’t borrow more than the total cost of attendance per year, you can borrow an unlimited amount of PLUS loans over a lifetime for an unlimited number of degrees.
That’s a difference from federal direct loans, which do have caps. Undergraduates can’t borrow more than $57,500, and graduates can’t borrow more than $138,500.
PLUS Loans Are Unsubsidized
Federal PLUS loans are unsubsidized. That means interest begins accruing immediately after the funds are disbursed (paid out to you). With subsidized loans, the ED covers all the interest during periods of deferment. That includes in-school deferment.
So if you have any subsidized direct loans, as long as you’re attending school at least half-time and your loans are in deferment, no interest accrues. But interest does accrue on all your unsubsidized loans.
Thus, when the student graduates, the loan balance will be larger than the original amount borrowed.
Plus, if you opted to defer payments during school, the interest will be capitalized (added to the principal balance) when the loan enters repayment, which happens after graduation or when the student (whether you or your child) leaves school or drops below half-time enrollment.
(Note that no federal loans, subsidized or unsubsidized, have been accruing interest throughout the COVID-19 relief period, which is in effect until Sept. 30, 2021.)
PLUS Loans Have Higher Fixed Interest Rates
The interest rates for PLUS loans, which are the same for both parent PLUS and grad PLUS, are higher than for direct loans.
Congress determines the rate annually, and it’s tied to the most recent 10-year Treasury Note auction. Congress determines the fee by adding 4.6% to the high yield of the 10-year Treasury Note. The government caps PLUS interest rates at 10.5%, so they can’t go above that.
The interest rates are set beginning in July of each year. For the academic year starting July 1, 2021, and ending July 1, 2022, the interest rate on PLUS loans is 6.28%.
Contrast this with direct loans, which have significantly lower interest rates of 3.73% for undergraduate borrowers and 5.28% for graduate borrowers.
PLUS loans also have a fixed interest rate, meaning it doesn’t change for the life of the loan. So whatever the rate was the year you borrowed is the rate you’re stuck with.
PLUS Loans Have Origination Fees
Interest rates aren’t the only costs involved with federal student loans. You also pay origination fees. An origination fee is a percentage taken off the top when the loan is disbursed.
Both direct loans and PLUS loans have origination fees, but the fee for a PLUS loan is much higher. As with interest rates, the fee is also federally determined on an annual basis based on the federal budget, but this time from October to October.
The fee for PLUS loans disbursed between Oct. 1, 2020, and Oct. 1, 2021, is 4.228%. The fee has remained the same for loans disbursed between Oct. 1, 2021, and Oct. 1, 2022.
So if you borrow $10,000, you only receive $9,577.20. But you’re still responsible for repaying the entire $10,000, and interest accrues on the total amount.
Note that schools typically disburse money in two installments (one each semester). The fee is applied proportionally to each disbursement.
Parent PLUS Loans
The parent PLUS loan allows parents of dependent undergraduate students to borrow whatever money they need to cover the costs of their kids’ educations beyond other financial aid or their savings.
Parent PLUS loans are a unique form of student loan in that they’re the parent’s financial responsibility, not the student’s.
Eligibility Requirements for a Parent PLUS Loan
To be eligible for a parent PLUS loan, you must meet certain criteria.
- You Must Be a Parent. Only parents — including biological, adoptive, or stepparents (only while they’re married to the student’s biological parent) — qualify for a parent PLUS loan. If you’re a grandparent or legal guardian, you can’t take out a PLUS loan for the student, even if you’re legally responsible for them.
- Your Child Must Be an Undergraduate. You can’t take out a parent PLUS loan for a graduate or professional student. But they can take out their own PLUS loan with the grad PLUS option. It’s a better one, anyway. The grad PLUS loan has more benefits.
- Your Child Must Be Enrolled at Least Half Time at an Eligible School. Your child must be actively attending and participating in an accredited degree or certificate-granting program to qualify for financial aid.
- You Can’t Have an Adverse Credit History. You don’t need a good credit score to get approved for a federal student loan. All you need is the absence of an adverse credit history. According to the ED, that includes debts of more than $2,085 that are 90 days or more delinquent; a default, bankruptcy discharge, or repossession on your credit report within the last five years; a foreclosure, wage garnishment, or tax lien within the last five years; or federal student aid charge-off within the last five years.
- You Must Qualify for Federal Student Aid. You must meet the general eligibility requirements for federal loans, including being a United States citizen or eligible noncitizen and having a valid Social Security number.
How to Apply
To get a parent PLUS loan, speak with a financial aid representative at your child’s college or search for application instructions on the college’s website. The federal PLUS loan is disbursed through the financial aid office, so they oversee the application process and determine how much you can borrow.
Typically, you follow these steps:
- Submit the FAFSA. If they haven’t already, your child must first submit the Free Application for Federal Student Aid (FAFSA) on the ED’s Federal Student Aid website. The FAFSA becomes available each October, and the deadline for completing it is the June 30 before the start of that academic year.
- Apply for a Parent PLUS Loan. Create an account on Federal Student Aid and complete the application for a parent PLUS loan. It asks for both your and your child’s personal information, including things like the school’s name, your address and Social Security numbers, dates of birth, and your financial information, including your latest tax return, records of any untaxed income, and bank account balances. It will also ask how much you want to borrow.
- Pass a Credit Check. The ED checks your credit. You don’t need good credit or even a minimum income. But you can’t have an adverse credit history. If you do, it won’t approve you without an endorser (the ED’s version of a co-signer) who doesn’t have an adverse credit history and agrees to repay the loan if you don’t. Alternatively, you can submit documentation explaining the reasons for the adverse history.
- Sign a Master Promissory Note. When you sign the master promissory note, you agree to pay back the loan according to its terms and conditions. You usually only need to sign it the first time you borrow because it’s good for 10 years.
- Reapply Annually. You must resubmit the FAFSA and PLUS loan applications annually. That’s because your information could change from year to year. Your school’s total cost of attendance could also vary from year to year. And you can only borrow federal student loans one year at a time. But as long as your circumstances don’t change much, you can easily transfer your information from one year to the next when you fill out a renewal.
The ED sends the funds from a PLUS loan directly to the school. The college financial aid office then applies the money to any unpaid balance on the student’s account, including covering their tuition, fees, and any room and board.
The school refunds any remaining amount to the parent within 14 days. Or parents can authorize the college to refund the leftover PLUS loan funds directly to the student to use for miscellaneous expenses, including purchasing textbooks.
As with other student loans, PLUS loans are typically disbursed in two installments — one per semester.
Unlike federal direct student loans, parent PLUS loans have no grace period, a period during which you don’t have to pay monthly payments after you graduate or drop below half time. They also don’t have automatic in-school deferment.
Parents must begin repaying the loan as soon as it’s disbursed. However, you can request a deferment and a six-month grace period when you complete your application for a parent PLUS loan. But remember that interest accrues on the loan from the moment it’s disbursed, and that interest will capitalize once the loan enters repayment.
Repayment options for parent PLUS loans include:
- Standard Repayment Plan. The standard repayment period is 10 years. But if you consolidate your loans, you can extend the repayment period up to 30 years. That’s one way to lower the monthly payment to make it more manageable. But that makes the loan significantly more expensive due to the accumulated interest over a longer period.
- Graduated Repayment Plan. With the graduated plan, you also pay your loan over 10 years unless you opt to consolidate, in which case you can take up to 30 years. Rather than being fixed, your payments start low and then increase every two years.
- Extended Repayment Plan. The extended plan is available to borrowers who owe more than $30,000 in direct loans. It allows you to pay off your loans over 25 years by making either fixed or graduated payments.
- Income-Driven Repayment. If needed, you can enroll your parent PLUS loans in an income-driven repayment plan (IDR). These plans allow you to make payments based on your income and family size. But the only plan parent PLUS loans are eligible for is income-contingent repayment (ICR). And to be eligible, you must first consolidate your loans through a federal direct consolidation loan.
- Forgiveness. Parent PLUS loans are eligible to have the remaining balance forgiven after making 25 years of payments on an IDR plan or 10 years of payments through the Public Service Loan Forgiveness (PSLF) program. To have a loan forgiven through PSLF, one must work full time in a qualifying public service job while making the payments. Note that for a parent PLUS loan to be forgiven through PSLF, it must be the parent who is working in the qualifying public service job.
- Cancellation and Discharge. Parent PLUS loans are eligible for discharge upon the death of either the parent or the student for whom they were borrowed. They are also eligible for discharge if the parent borrower becomes totally and permanently disabled. And they’re eligible for all the other loan cancellation provisions, such as the closed school discharge, false certification discharge, bankruptcy discharge, unpaid refund discharge, and borrower defense to repayment discharge.
See our complete guide to repaying federal student loans for more information.
Is a Parent PLUS Loan Right for You? Pros & Cons
Although it’s helpful to be able to borrow federal student loans to cover the total cost of your child’s education, a PLUS loan might not be suitable for all parents.
If you must turn to financing to cover any gaps in financial aid, a private student loan is the alternative, and there are pros and cons to private student loans too.
Regardless of which you choose, think carefully before taking out any loan.
There are several significant advantages to borrowing a parent PLUS loan over a private student loan.
- It’s Easier to Get Approved for a PLUS Loan. Unlike the ED, private lenders check your credit score, income, and income-to-debt ratio to qualify you for a loan. But private lenders set the bar higher, looking at your total creditworthiness rather than just an absence of adverse entries.
- Your Credit Score Doesn’t Determine Your Interest Rate. Even if you’re able to get a private loan with less-than-stellar credit, you won’t qualify for the best interest rates. But federal law, not your credit score, determines the interest rates for PLUS loans.
- Deferment and Forbearance Are Available. Private lenders don’t have the same generous deferment and forbearance terms as the federal government, including in-school deferment and economic hardship deferment. Although many lenders offer these options, the terms are often significantly shorter, such as 12 or 24 months.
- Parent PLUS Loans Have Numerous Repayment Options. No private lender matches the number of flexible repayment options offered by the ED, including IDR. And no private lender offers loan forgiveness, including PSLF.
- Borrower Protections Are in Place. Private lenders don’t have the same level of borrower protections, including cancellation and discharge options. Most private lenders won’t discharge your debt obligation if the student on whose behalf you borrowed the loan dies or you become totally and permanently disabled.
Despite the number of advantages to PLUS loans, there are some situations in which a private student loan could be the better option. There are also times when it’s better to find a way to avoid borrowing altogether.
- The Interest Rates Are High Compared to Federal Direct Loans. For the 2021-22 academic year, the interest rate on a parent PLUS loan is 2.55 percentage points higher than that on a direct loan for undergraduate students. If you have excellent credit, you may be able to find a student loan from a private loan company for around the same interest rate as the difference.
- The Origination Fees Are Steep. The ED deducts a fee of 1.057% when it disburses direct loans. Contrast that with the 4.228% origination fee of the parent PLUS loan.
- Parent PLUS Loans Have Fewer IDR Options Than Direct Loans. While there are more repayment options on PLUS loans than private loans, parent PLUS loans currently only have access to the IDR plan with the least favorable terms. Your monthly payment is higher than your child’s direct loans will be, and there’s no interest subsidy.
- The Interest Is Capitalized. If you opted to defer payments while your child was in school, any unpaid interest is capitalized on the principal balance once they graduate or drop below half-time enrollment. So your balance will be higher, and you’ll now be paying interest on interest. Capitalization also happens annually if you enroll in IDR.
- You Could Be Paying the Loans Into Retirement. Especially if you sign up for IDR, you’ll be in repayment for 25 years before your loans become eligible for forgiveness. If you’re borrowing for your kid’s education, that means you could be paying on their loans well into your retirement years. That’s just one of the many reasons IDR isn’t right for everyone.
The Bottom Line
Because PLUS loans come with such high interest rates, if you have excellent credit, it’s worth it to at least shop around to see if you can get a better rate from a private lender. A lower interest rate means a less costly loan, which you can repay faster.
Use a comparison tool like Credible to compare offers from private lenders. It makes a soft credit inquiry to match you with prequalified offers, so it won’t affect your credit score. If you can get a significantly better interest rate than on the current parent PLUS loan, your loan will be less costly.
But if you have a low credit score or think you’ll need the flexible repayment options the ED offers, stick with the parent PLUS loan.
Also, you’re ultimately the one responsible for the loan. Though you can make an informal agreement with them, you can’t legally transfer it to your child.
Further, no matter how much you want to help your children by paying for their education, it doesn’t help anyone if it means bankrupting your retirement. So be careful not to overborrow.
As a rule, never borrow more than your annual income. As long as your total PLUS loan debt is less than your annual income, you should be able to repay the loan in 10 years or less.
Grad PLUS Loans
The grad PLUS loan works similarly to the parent PLUS loan. It allows graduate and professional students to borrow up to the total cost of attendance at their school, minus any other financial aid received.
The key difference is that the student becomes the borrower rather than the parent. That’s because the ED considers all graduate students financially independent.
But there are other crucial differences.
For example, with the borrowing responsibility transferred to the student, the grad PLUS loan enables the student to consolidate it with their other federal student loans, including their undergraduate loans if they decide consolidation is right for them.
And grad PLUS loan borrowers have access to more loan repayment options.
Eligibility Requirements for a Grad Plus Loan
To be eligible for a grad PLUS loan, you must meet certain criteria.
- You Must Be a Graduate or Professional Student. You must be a student at either a graduate or professional (law or medical) school.
- You Must Be Enrolled at Least Half Time at an Eligible School. You must be actively enrolled at least half-time at an accredited school in a program leading to a graduate or professional degree or certificate. That includes students who are doing research or actively working on their thesis or dissertation, as they earn credit hours for this work that qualify them for PLUS loans.
- You Can’t Have an Adverse Credit History. You must not have any negative marks on your credit report, including debts of more than $2,085 that are 90 days or more delinquent; a default, bankruptcy discharge, or repossession on your credit report within the last five years; a foreclosure, wage garnishment or tax lien within the last five years; or federal student aid charge-off within the last five years.
- You Must Qualify for Federal Student Aid. You must meet the general eligibility requirements for federal loans, including being a U.S. citizen or eligible noncitizen and having a valid Social Security number.
How to Apply
To get a grad PLUS loan, talk to a financial aid representative at your school or visit your school’s website. Since the federal PLUS loan is disbursed through the financial aid office, they oversee the application process and determine how much you can borrow.
Typically, you’ll follow these steps:
- Submit the FAFSA. You must first submit the FAFSA on the ED’s Federal Student Aid website. The FAFSA determines your eligibility for all federal aid, including grants, scholarships, federal direct loans, and the grad PLUS loan.
- Apply for a Grad PLUS Loan. Complete the application for a grad PLUS loan. It asks for your personal information, including things like the school’s name, your address, Social Security number, driver’s license number, date of birth, and financial information. You also need your latest tax return, records of any untaxed income, and bank account and investment balances.
- Pass a Credit Check. The ED will check your credit. You don’t need good credit or even a minimum income, but you can’t have an adverse credit history. If you do, you must apply with a co-signer (the ED uses the term “endorser”) who doesn’t have an adverse credit history and who agrees to repay the loan if you don’t. If you don’t have someone willing to risk co-signing or you don’t want to use a co-signer, you can appeal a loan denial by submitting documentation explaining the reasons for the adverse history.
- Sign a Master Promissory Note. If you’re eligible for a loan, you must agree to the terms by signing a master promissory note. You usually only need to sign it the first time you borrow because it’s good for 10 years. You also need to complete entrance counseling.
- Reapply Annually. You must resubmit the FAFSA and PLUS loan application annually.
PLUS loan funds go first to the school, which applies them to your outstanding balance, including your tuition, fees, and room and board. Then, the school refunds any remaining balance to you within 14 days.
Once it’s in your hands, the ED doesn’t track student loan money. So you’re free to spend it on whatever you need to, whether that’s textbooks or your rent payment.
When planning your budget, know that PLUS loans, like other federal loans, are typically disbursed in two installments — one per semester.
Unlike parent PLUS loans, grad PLUS loans have automatic in-school deferment. As long as you’re enrolled in school at least half time, you aren’t responsible for making any payments. This process should happen automatically, meaning there’s no need to notify your loan servicer. They already know you’re in school.
As soon as you graduate or drop below half-time enrollment, your loans automatically enter into repayment. However, you have a six-month grace period before you must begin repaying the loan.
Once you enter into repayment, your options include:
- Standard Repayment Plan. While the standard plan is technically 10 years, it also includes consolidation, which brings the ability to extend payments up to 30 years.
- Graduated Repayment Plan. This plan allows you to start with smaller payments, which gradually increase every two years, allowing you to repay them over 10 years.
- Extended Repayment Plan. Borrowers who owe more than $30,000 in direct loans can pay them off over 25 years by making either fixed or graduated payments.
- Income-Driven Repayment. Grad PLUS loans are eligible for all four of the IDR plans. So if you need IDR, you can choose the one with the best terms for your situation.
- Forgiveness. Grad PLUS loans are eligible to have the remaining balance forgiven after making 20 to 25 years of payments on an IDR plan or 10 years of payments through PSLF.
- Cancellation and Discharge. Grad PLUS loans are eligible for all the federal cancellation and discharge programs, including discharge upon death, total and permanent disability, a closed school, an unpaid refund, or false certification. You can also attempt a discharge through borrower defense to repayment or bankruptcy.
Is a Grad PLUS Loan Right for You? Pros & Cons
While the high cost of an undergraduate degree gets all the press, earning a graduate degree is an even more costly endeavor.
For some, the promise of a lucrative career in law, medicine, or business makes the investment in graduate school worth it. But graduate students are also the most likely to have six-figure student loan debt, according to 2019 statistics from the Pew Research Center.
So while it’s helpful that PLUS loans allow students to cover the entire cost of their education with federal loans, they aren’t the right answer for everyone. It’s beneficial to consider all the pros and cons before signing on the dotted line.
If you’re wary of private loans, the only alternative to federal PLUS loans for financing your education, grad PLUS loans have definite advantages.
- Grad PLUS Loans May Have Better Interest Rates for Most Borrowers. Unless you have excellent credit, most private lenders will offer you a student loan with an interest rate similar to or higher than that of a grad PLUS loan. But it never hurts to shop around to see what kind of rate you can qualify for.
- You Have Access to More Flexible Repayment Options. Unlike with the parent PLUS loan, grad PLUS loans are eligible for repayment under all the IDR plans. So if you need to repay under IDR, you can pick the one that best suits your unique situation. And with the exception of limited deferment and forbearance, these flexible repayment terms aren’t available at all on private loans.
- Loan Forgiveness Is an Option. Since graduate students are far more likely than undergraduates to have high loan balances relative to income, they’re also more likely to need forgiveness options. That’s especially true of those working in public service careers, who are ideal candidates for PSLF. Jobs like teaching, public defense law, and many health care professions require advanced degrees but come with low pay that’s unlikely to pay off those degrees. That’s exactly what PSLF was designed for.
Although there are unquestionable advantages to borrowing a grad PLUS loan over a private student loan, a private loan could be the better option for some students. And others may want to rethink borrowing additional loans altogether.
- The Interest Rate Is Higher Than Federal Direct Loans. The interest rates on federal graduate loans versus undergraduate loans are always higher. But grad PLUS loans are even costlier than direct loans. For example, for the 2021-22 academic year, the interest rate on a grad PLUS loan is a whole percentage point higher than on a direct loan.
- The Origination Fees Are Steep. The ED deducts a fee of 1.057% when it disburses direct loans. But the origination fee for a grad PLUS loan is 4.228%. But most private lenders don’t charge any fees. That said, origination fees are a one-time thing. Finding a lower interest rate, which will affect the loan over its lifetime, should be your highest priority.
- The Interest Is Capitalized. If you opted to defer payments while you were in school, any unpaid interest is capitalized on the principal balance once you graduate or drop below half-time enrollment. Your balance will then be higher, and you’ll be paying interest on interest. To avoid that, make interest-only payments while in school if you can.
The Bottom Line
It never hurts to shop around, especially if you have excellent credit. Use a comparison tool like Credible to compare student loan offers from private lenders. Because it makes a soft credit inquiry to match you with prequalified offers, it won’t affect your credit score.
If you can get a significantly better interest rate than the current grad PLUS loan offers, your loan will be less costly.
Also consider that some private lenders specialize in loans for certain types of students. For example, Laurel Road offers low-rate student loans to health professional students. And their loans come with flexible repayment options and a rate reduction once one finds employment.
Refinancing your student loans with a private refinance lender after graduation is also an option. In fact, for those with excellent credit, refinancing offers lower rates than an original loan.
But if you refinance federal student loans into private loans, you lose access to all the federal repayment options and borrower protections. That includes the ability to defer your loans in times of economic hardship.
You also lose the ability to have your loans forgiven. That may not matter to you since not everyone can benefit from student loan forgiveness.
But if you’re planning to make use of forgiveness, especially PSLF, avoid private loans, which aren’t eligible for forgiveness.
Before you sign for any loan, it’s vital to understand what you’re getting into. Many financial experts consider student loans an investment in your future.
But it’s easy to overborrow, especially with PLUS loans. Because you can borrow as much as you need with no lifetime limit, it’s tempting to take out more in loans than necessary.
But when you consider the high interest rate on PLUS loans, that debt can become overwhelming quickly. To avoid that, first exhaust all other options to pay for school, including grants, scholarships, and personal savings. And if you must borrow PLUS loans, only borrow exactly what you need.