PLUS loans are federal loans that parents of dependent undergraduate students can use to help pay for college or career school expenses that are not covered by other financial aid. The amount available to the parent is the student's cost of attendance minus any other financial aid received. The current interest rate for Direct PLUS Loans is a fixed rate of 6.41 percent. There is also a 4.204 percent loan origination fee on all Direct PLUS Loans.
As parents of high school and college students look at total costs for their children's education, they need to evaluate whether these loans make sense for their personal financial situation. Some points to take into consideration:
• Total Costs of Borrowing: Currently at 3.86 percent, interest rates on loans to students are lower than those on the PLUS loans. Unsubsidized student loans do not require a demonstration of financial need, but some parents do not like the thought of saddling their child with any type of debt. They know that student loan repayment usually begins shortly after graduation and can impact their child's ability to borrow money at a crucial point in their lives. Parents may want to have a serious talk with their children about the impact of loans, and decide if they will be willing to help in repayment.
• Alternative Forms of Borrowing: Although the interest rate is only 6.41 percent, parents should also investigate other forms of borrowing. If they are younger, they may want to look at the pros and cons of borrowing against retirement plans or life insurance. Older parents may be able to take out a home equity line of credit. Some grandparents may be willing to loan money at lower interest rates. These decisions involve thinking about the long-term effect of the borrowing and the impact on the parents' lives as well as any others involved.
• Your Child's Career Plans: When a child enters into certain career fields, there may be the possibility of having a portion of the student loans forgiven at some point down the road. It may make sense to borrow as much as possible under the child's name and have the parents participate in the repayment process.
• Parents With a Bad Credit History: Some parents may already be faced with credit difficulties and may not be eligible for PLUS loans. In those cases, the student may be able to borrow an additional amount.
• The Value of Attending a Certain School: For some families it may not make sense to borrow huge amounts of money to send the child to a particular college. They may need to investigate other lower-cost alternatives that will be easier to repay.
A Professional Can Help
As with all decisions about borrowing money, there are many factors to take into consideration. The choices you make now could affect your child and your family for many years to come. Each decision must be made based on your family's unique situation, financial resources, number of children, age of parents, and other factors. The best approach, of course, is not to have to borrow any money at all, but this is highly unlikely for most families in these unsettled economic times.
Since this process can become so confusing, it might be helpful to review your total situation with a professional college financial aid adviser. This person can take the time to help you look at your total family situation, review the costs associated with your child's preferred colleges, and help you look for other funding sources. That will help you make the best choice for your situation.