As the cost of education has continued to increase in recent years students who have relied on traditional Stafford loans have frequently found that they are no longer covering most of their expenses. The PLUS program (Parent Loans for Undergraduate Students) was therefore introduced and is intended to assist in closing the gap between the funds available from student loans and the cost of education.
Though the interest rate is higher than that for other loans the ceiling on borrowing is a great deal more flexible and the loans are not need-based.
In the case of the FFEL program (Federal Family Education Loan) in which private lenders fund the loan the interest rate is currently 8.5% and loans funded by the US Department of Education under the Direct loan program are currently charged at 7.9%. The difference of 0.6% might look inconsequential but can turn out to be very substantial over the lifetime of the average loan.
Under the PLUS loans program parents are allowed to borrow up to the full cost of education minus the amount of any financial aid which the child is receiving. Although PLUS money is not cheap it can frequently make a considerable difference when it comes to choosing which college to attend or whether or not to attend at all.
However, because PLUS loans are not based upon need, they do need a credit check before approval. Generally it is the parent's and not the student's credit which is checked since the parent is the signatory to the promissory note and will be responsible for meeting repayments on the loan.
In those rare cases where the parent's credit history makes him or her ineligible for a PLUS loan a co-signer may come into play and a relative or other party may guarantee repayment and assume legal responsibility as a co-borrower. With recent problems in the sub-prime borrowing arena however such cases are less rare than they once were. That suggests that in borderline cases the need for a co-signer is more likely.
Aside from changes in interest rates another fairly recent alteration to the program is its extension to permit professional and graduate students to obtain PLUS loans. The same interest rates and eligibility criteria apply and they must be studying at an appropriate institution and on an eligible program.
Different from many student loan programs, repayments on PLUS loans begins right away and the first payment is typically required within 60 days of the loan monies are disbursed. Interest begins to build up from the time the first disbursement is made and both interest and principal must be paid in regular monthly installments while the student is in college. Payments are made to the private lender in the case of FFEL loans and to a US Department of Education servicing center in the case of Direct loans.
Make sure that you work out the costs of obtaining a PLUS loan very carefully and look on it as a loan of last resort. Even a home equity loan Could prove to be less expensive as the interest is tax-deductible.
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