As the cost of education has continued to climb in recent years students who have depended on traditional Stafford loans have often found that they do not meet the majority of their expenses. The PLUS program (Parent Loans for Undergraduate Students) was thus introduced and is intended to close the gap between the monies provided by college loans and the cost of education.
Although the interest rate for PLUS loans is higher than other loans the cap on borrowing is much more flexible and the loans are not need-based.
In the case of the FFEL program (Federal Family Education Loan) for which private lenders fund the loan the interest rate is currently 8.5% and loans provided through the US Department of Education under the Direct loan program are currently charged at 7.9%. This difference of 0.6% may look insignificant but can prove to be very substantial over the lifetime of the average loan.
With PLUS loans parents are allowed to borrow up to the full cost of education minus any other financial aid amount that the child is receiving. Although PLUS loans are not exactly cheap they can often make a considerable difference when it comes to choosing which school to attend or indeed whether or not to attend at all.
But, since PLUS loans are not based upon need, they do need a credit check before approval. Normally it is of course the parent's rather than the student's credit that is checked since the parent is the signatory to the promissory note and will be responsible for meeting repayments on the loan.
In those cases where the parent's credit history disqualifies him or her from a PLUS loan a co-signer may be brought into the equation and a relative or other party may agree to guarantee repayment and assume legal responsibility as a co-borrower. With the recent difficulties in the area of sub-prime borrowing however those cases are more common than they used to be. This suggests that in borderline cases the need for a co-signer is becoming increasingly likely.
Apart from changes in interest rates another fairly recent change to the program is its extension to allow graduate and professional students to obtain PLUS loans. The same interest rates and eligibility criteria apply and they need to be studying at a suitable institution and on an eligible program.
Unlike many college loan programs, repayments on PLUS loans begins right away and the initial payment is usually required within 30 to 60 days after the loan funds are disbursed. Interest begins to build up from the time the first disbursement is made and both principal and interest are paid in regular monthly installments while the student is in school. Payments need to be made to the specific lender in the case of FFEL loans and to a US Department of Education servicing center for Direct loans.
Make sure that you calculate the costs of obtaining a PLUS loan very carefully and view it very much as a loan of last resort. Even something like a home equity loan might well be less expensive because the interest is tax-deductible.
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