If your son or daughter is applying to colleges, you may be thinking about taking out a PLUS Loan. The cost of higher education is staggering and this low-interest loan is one option that allows you to invest in your child’s future. Just as any other financial tool, however, you must understand how they work and how they will affect your financial future.
What are PLUS loans?
These are low-interest loans made by the federal government to parents of college students. They are awarded through the FAFSA program. Currently they carry a fixed 6.31 percent interest rate which will not change for the life of the loan, and a 4.272 percent fee. This rate is recalculated on the first day of July every year. The loans also allow parents to defer repayment until after their child graduates, but interest accrues from the time of the first disbursement.
You Must Quality for This Loan.
The loan is only available to parents of undergraduate, dependent students. The government requires all applicants to pass a credit check. You can never have defaulted on a student loan. If your credit record is not squeaky clean, you may still qualify if someone with great credit will guarantee your loan. Edvisors Network.com says that if your student is a male, he must register with the selective service. You and your student must be American citizens, permanent residents or have legal status as a non-resident to qualify for the loan. Your son or daughter has to be registered at least half-time at the college and the funds must be used exclusively for educational purposes.
What are the Pros and Cons of the Program?
This loan requires no collateral. The interest is also deductible from your taxes. There are several repayment options. The standard method, which is the default choice, is a ten-year loan with a maximum of 120 payments, and you must pay at least $50 a month. You can opt for a longer loan of up to 30 years. That will decrease your monthly payments but increase the total cost of the loan through added interest. You might also elect to repay your loan on the graduated schedule. This method begins with payments that are just above paying the interest only, and then every two years the payment amount increases.
If your financial status changes while you are repaying the PLUS, you can apply for a 12-month deferment or for a “forbearance” which is a modification of your repayment schedule. One down-side to this loan is that you cannot consolidate it with your student’s loans. Finweb.com points out that, although the parent loan is a low-interest way to help your child avoid overwhelming debt when he leaves college, it may not carry the lowest interest rate. You are offered a better rate than you would probably get from a private lender, but your student may have a better rate on his direct loan and you can always help him make his payments. You must be careful to borrow only what your child needs, however, since there is no maximum. That means if you have a large loan, you could be paying on it well into your retirement years.
This is one option you might choose to help your child repay his college debt; it certainly is not the only option available to you. Because you are considering an obligation that may affect your savings or retirement, it is important to choose carefully. Compare interest rates and look realistically at your ability to repay the loan without compromising your own quality of life. Used wisely, the PLUS loan cam is a valuable financial tool to assist your child in obtaining the education he needs to get the future he wants.
