Are you looking at your student’s financial aid package and considering a Parent PLUS loan, but are worried about making loan payments immediately? There are ways to keep payments affordable while your child is in college, but it’s important to know the cost.
Our standard warning: Taking out a Parent PLUS loan is a big commitment. It’s important to know your options and get all your questions answered before you sign any documents.
Start by reading our 10 facts about Parent Plus loans. And then read on for answers to questions that parents or guardians often ask before taking on college debt for their student.
Q: What if I can’t afford to make the full loan payments?
A: You have repayment options, but again, proceed with caution. The longer you take to pay back your loan, the more you’re likely to pay over the life of the loan.
Q: What are my repayment options?
A: Parent PLUS loan repayment periods vary from 10 to 30 years depending on which repayment plan you choose and whether you need to consolidate multiple loans.
Here are the common options:
The Standard Repayment Plan: This is a 10-year repayment term, where the monthly payments are the same for all 10 years. If you consolidate multiple loans, the payoff period runs 10 to 30 years.
The Extended Repayment Plan: Like the standard plan, the extended plan has a fixed monthly payment amount. However, your monthly payments will be smaller because you will be paying out the loan over a longer period of time – for up to 25 years.
The Graduated Repayment Plan: Unlike the standard and extended plans, your monthly payments will change over time. They start off lower – just slightly above the amount you need to pay to keep up on interest payments – and will increase every two years. (There is an upper cap on how much any payment can be.) The payoff period is 10 years, but you’ll end up paying more over the life of the loan than with the standard plan. If you consolidate multiple Parent PLUS loans, there are payoff options for 10 to 30 years.
The Income-Driven Repayment Plan: This option offers monthly payment amounts that are tied to the borrower’s discretionary income. (The government determines what you have to spend on loans based on your income tax filings). But there are extra requirements to qualify for this option. After a maximum of 25 years, the government forgives your remaining loan balance. You’ll need to consolidate your Parent PLUS loans if you have taken out multiple ones.
Not sure which repayment plan is right for you? The U.S. Department of Education’s Federal Student Aid website offers a loan simulator that allows you to test out loan repayment options before you commit.
Q: What if I can’t start paying back the loan right away or need to stop making payments while my child is in college?
A. Parent PLUS loan borrowers may request a “loan deferment” from their servicer (the organization that is managing your loan payments), which allows you to delay making any payments on the loan until six months after your child graduates or is no longer enrolled in college at least half-time.
A few important points about deferment:
You may pay down the interest (called “interest-only” payments) during the deferment period, but you are not obligated to do so. Read a sample deferment request form.
We strongly encourage you to, at the very least, pay off the interest that is building up, or “accruing” during your deferment. You may do this via monthly interest-only payments or in lump sums, typically once or twice a year. Any accrued interest that is not paid down before the end of the deferment period will be capitalized
What does “capitalized” mean? Any accrued interest that you do not pay down by the end of the deferment period becomes part of the loan amount. (This is called your “principal.”). Basically, you’ll end up paying interest on your accrued interest. That gets expensive fast. This increases your monthly payments as well as the total amount you pay over the life of the loan.
Example: Let’s say you took out a $10,000 Parent PLUS loan when your child was a freshman and you deferred payment until six months after graduation. It’s now six months after your child graduated and you owe an additional $2,500 in interest because you did not pay down any of it. At the end of the deferment period, the principal becomes $12,500 and interest will be based on that higher loan amount. If you had paid down your interest during deferment, the principal loan amount would still be $10,000.
Read more about loan deferments at Federal Student Aid.
Q: I want to help my child pay for college, but is it worth it to take out a Parent PLUS Loan?
A: Good question! The answer is complicated. You’ll be taking on debt later in life and you may have retirement to think about. If you are absolutely determined to help out your child as much as possible, think about the following:
- How secure is your job and your other sources of income?
- How close are you to retirement?
- If you are close to retirement, do you have enough in savings as well as expected income from pensions and social security to cover your cost of living plus these loan payments?
- Are you still paying back your own student loans?
- Does it make more sense for your student to take out additional loans, especially if there are some available to them at a lower interest rate than the Parent PLUS Loan? Remember: You could still help them make their loan payments, but avoid being legally responsible for the loan.
Q: I need to think it over more. What else should I consider?
A: Smart thinking! Taking out a loan is a big decision. Check out these additional resources to help you make the best choice for you and your family.
The Pros and Cons of Parent Plus Loans
Parent Plus vs. Private Student Loans
LendEDU explains the differences between Parent Plus and private loans. Another good read on the topic is this article by U.S. News & World Report.
How to Apply for a Parent Plus Loan
Laura Zingmond is the editor of InsideSchools.org and a seasoned veteran of the college financial aid system. Ask her anything about the FAFSA or CSS Profile.