How Student PLUS Loans Might Be Used To Close The Education Funding Gap

As the cost of a college education has continued to increase in recent years students who have been relying on traditional Stafford loans have frequently found that they fail to meet the majority of their expenses. The PLUS program (Parent Loans for Undergraduate Students) was thus introduced and is intended to assist in closing the gap between the sum available from college loans and the cost of education.

Although the interest rate for PLUS loans is higher than other types of loan the limit on borrowing is considerably more flexible and the loans are not need-based.

For the FFEL program (Federal Family Education Loan) for which private lenders provide the funds the interest rate is currently 8.5% and loans funded through the US Department of Education under the Direct loan program are currently charged at 7.9%. The difference of just 0.6% may appear inconsequential but can be very significant when viewed over the lifetime of the average loan.

Under the PLUS loans program parents are permitted to borrow up to the total cost of education minus the amount of any financial aid that the child is awarded. Although PLUS money is not cheap it can frequently make a difference when deciding which college to attend or indeed whether to attend at all.

But, as PLUS loans are not based upon need, they do need a credit check for approval. Normally it is the parent’s and not the student’s credit which is considered since the parent is signing the promissory note and is responsible for repayment of the loan.

In those cases where the parent’s credit history disqualifies him or her from a PLUS loan a co-signer can come into play and a relative or other third party can guarantee repayment and assume legal responsibility as a co-borrower. With the recent problems in the sub-prime borrowing arena however such cases are less rare than they once were. This means that in borderline cases the requirement for a co-signer is becoming increasingly likely.

Aside from interest rate changes another recent change to the program is its extension to permit professional and graduate students to qualify for PLUS loans. The same eligibility criteria and interest rates apply and they must be enrolled at a suitable institution and on a qualifying program.

Different from many college loan programs, repayments on PLUS loans begins immediately and the initial payment is generally required within 30 to 60 days after the loan funds are disbursed. Interest begins accumulating from the moment the first disbursement is made and both principal and interest are paid in regular monthly installments during the time that the student is in college. Payments must be made to the specific lender in the case of FFEL loans and to a US Department of Education servicing center for Direct loans.

It is important to work out the costs of obtaining a PLUS loan very carefully and look on it very much as a loan of last resort. Even something like a home equity loan may well be less expensive as the interest payments are tax-deductible.