How Does FAFSA Plus Loan for Parents Work?

The FAFSA PLUS Loan is an unsubsidized federal loan for parents and graduate students of dependent students. The Federal PLUS Loan, also called the Federal Direct PLUS Loan, is available after a student has exhausted their Federal Stafford Loan eligibility.

Types of FAFSA PLUS Loan

There are two versions of the FAFSA PLUS loan: the FAFSA PLUS loan for parents and the FAFSA PLUS loan for graduates.

Aside from differences in borrower, loan purpose, and certain clearance requirements, Parent PLUS and Grad PLUS loans are almost identical. The federal PLUS credit for college graduates was first offered on July 1, 2006 through an amendment to the federal PLUS credit for parents. Today, we will be focusing mainly on FAFSA PLUS loan for parents.

An Unsubsidized Loan

The FAFSA PLUS loan for parents is a subsidy-free loan. Interest begins to accrue immediately after payment. The federal government does not pay interest on the FAFSA PLUS loan.

If interest is not paid as it was earned, it will be added to the (covered) loan balance at the time the loan is paid. This increases the debt level. Once the interest is compounded, the interest accrues interest, which accelerates the growth of the loan.

FAFSA PLUS Loan for Parents Interest

Interest rates on FAFSA PLUS loans for parents are fixed rates that change only for new loans effective July 1st. The new interest rate is based on the last 10-year government bond auction in May. The FAFSA PLUS Loan interest rate is the same for the FAFSA PLUS Loan for Parents and the FAFSA PLUS Graduate Loan.

Interest rates are set according to this formula:

  • Borrower – Parent of an undergraduate student
  • Formula – 10-year government bond + 4.6%
  • Limit – 10.5%

The most recent interest rates are:

Parent of an undergraduate student

  • 2020-2021 – 5.30%
  • 2021-2022 – 6.28%

Loan Fees for FAFSA PLUS Loans for Parents

Borrowers of federal direct loans pay a processing fee. The processing fee for FAFSA PLUS loan for parents is approximately 4.2 percent, four times the fee for Federal Stafford loans. Loan interest is based on the interest rate in effect on the day the loan is disbursed. A loan fee is generally deducted pro rata from each loan disbursement, but borrowers can also add the fee to their loan balance. Borrowing rates change every October 1 based on the federal budget.

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The most recent rates are listed below.

Date                                  Loan                       Fees

October 1, 2020 – September 30, 2021 4.228 percent

October 1, 2019 – September 30, 2020 4.236 percent

October 1, 2018 – September 30, 2019 4.248 percent

Credit Limits for FAFSA PLUS Loans for Parents

The FAFSA PLUS Loan for parents has an annual cap equal to the cost of college education less other grants received. There is no total loan limit for the FAFSA PLUS loan. The student’s college determines how much a parent can borrow through the FAFSA Parent PLUS Loan or how much a graduate student can borrow through the FAFSA Graduate PLUS Loan.

If a dependent student’s parent is denied a Federal PLUS loan, the student is eligible for higher unsubsidized Federal Stafford loan limits, the same limits available to independent students.

Since parents can borrow almost unlimited money for their children with the Federal-PLUS loan, they must be careful to avoid over-indebtedness. Parents should not borrow more than their annual income for any of their children. If the total debt on the Federal -PLUS loan is less than the parents’ annual income, the parents should be able to pay off the loans in 10 years or less. If retirement is less than 10 years away, they should borrow proportionately less money. For example, if retirement is only 5 years away, parents must borrow half.

Eligibility for FAFSA PLUS Loan for Parents

Borrowers applying for a Direct Federal PLUS loan are subject to a credit check and must not have a negative credit history. Otherwise, PLUS loan borrowers do not have to have a good credit rating, such as a high credit score, a minimum income threshold, or a low debt-to-income ratio. The credit criteria for a FAFSA PLUS loan for parents are retrospective and take into account whether the borrower has had financial difficulties in the past. The PLUS loan does not take into account the future repayment capacity of the borrower.

As with Federal Stafford Loans, the student must be enrolled for at least half of the academic year and have satisfactory academic progress, e.g. Submission of the Free Application for Federal Student Aid (FAFSA) is also required before the student or parent can receive federal student loans.

To obtain a loan under the FAFSA PLUS Loan for Parents program, one parent must be the biological or adoptive parent of the college student or married to the student’s parents. Therefore, stepparents can only take out Federal Parent PLUS loans if they are married to the student’s biological or adoptive parent. If the stepparent’s spouse dies or if the stepparent divorces, the stepparent is no longer eligible for the Federal Parent PLUS Loan.

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The parent and student must also meet other general eligibility requirements for federal student aid, including citizenship status, the student’s enrollment in a qualifying degree or certificate, and neither the student nor the parent is in default from a federal student loan or scholarship overpayment.

How to Apply for a FAFSA PLUS Loan for Parents

To receive a FAFSA PLUS loan for parents, contact your college scholarship office. The Federal PLUS Loan is disbursed through the Office of Student Grants, which administers the application process and determines the maximum amount you can borrow. You will be asked to complete a PLUS loan application on the Studentaid.gov website. You may be required to complete an intake consultation.

PLUS loan borrowers must also sign a Master Promissory Note (MPN) at Studentaid.gov to receive a federal PLUS loan. The master promissory note is valid for uninterrupted enrollment in a particular university for a period of up to 10 years.

Loan Disbursement

The federal government disburses funds from a Federal PLUS loan directly to the college. The college financial aid office then uses the loan funds for tuition and fees (plus room and board if the student lives on campus).

Any remaining credit will normally be “refunded” to the student or parent within 14 days. (Parents may authorize the college to repay the student any remaining Federal Parent PLUS Loan funds.) The 30-day limitation period for new borrowers in the first year does not apply to Federal Parent PLUS loans. Federal PLUS loans are generally repaid in two installments.

Loan Repayment

FAFSA PLUS loans for parents begin repayment within 60 days of full disbursement. However, parents can request a deferral from their loan officer to delay the start of payment until the end of the six-month grace period after the student graduates or falls below midterm. Payment can also be deferred as long as the parent borrowing a FAFSA PLUS loan for parents is at least half enrolled at a university. Interest accrues and is added to the loan balance if not paid when it accrues.

A parental loan cannot be repaid directly based on income. However, if loan repayment began on or after July 1, 2006 and is included in a direct federal consolidation loan, the consolidation loan qualifies for the income-contingent repayment (ICR). This can also make the FAFSA PLUS loan for parents eligible for public service loan forgiveness.

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Otherwise, FAFSA PLUS loans for parents are eligible for 10-year standard repayment, graduated repayment, and extended repayment. Please note that Congress may close this ICR loophole for Parent PLUS loans in the future.

Parents cannot transfer a FAFSA PLUS Loan for parents to the student unless they refinance with a private lender and waive the protections of the federal loan. However, nothing prevents a student and parent from entering into a side agreement in which the student agrees to make Federal Plus Parental Loan payments. However, students should be careful not to borrow too much.

Borrowers who sign up for Direct Debit, where monthly loan payments are automatically transferred from the borrower’s bank account to the lender, may qualify for a 0.25 percent interest rate reduction as an incentive.

FAFSA PLUS Loan for Parents Cancellation

Federal Direct PLUS loans are redeemable upon the death or total and permanent disability of the borrower. In addition, FAFSA PLUS loans can be terminated in the event of the death (but not disability) of the student on whose behalf the loan is requested.

FAFSA PLUS loans for parents are also eligible for other loan termination provisions such as the false certificate discharge, unpaid refund discharge, bankruptcy discharge, closed school discharge, and identity theft discharge. You may be eligible for loan forgiveness, such as public service loan forgiveness that requires working in a specific job for a specific period of time while the loans are repaid.

Alternatives to the FAFSA PLUS Loan for Parents

If the student has exhausted Federal Stafford Loan eligibility, Federal Direct PLUS loan alternatives include private parent loans and private student loans. Private loans usually require a creditworthy co-signer, which is typically the parent company.

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