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This guide aims to shed light on the world of parent loans, their types, general eligibility criteria, how repayment works in general, and the pros and cons to each type of parent loan.
Financing a student’s education is a significant undertaking for many parents, and understanding the different options available to assist them with that is crucial. We published another blog post, where we talked about all of the different options a student has to help fund their education. Specifically, we discussed and provided examples of student loans, university and external merit scholarships, and need-based grants.
While these are all good options, sometimes what a school offers the student is not enough. Another avenue of financial support is borrowing a parent loan, which can help bridge the gap between what the school offers your student, and what you can pay out-of-pocket.
Keep in mind, loans are not always the best option for every family!
It is imperative that folks enter into the decision to borrow funds with as much information as possible. Our hope with this article is that parents will gain valuable insights to make informed decisions about financing their child's college education.
Parent loans, as the name suggests, are loans that parents (biological, adoptive, or step-parents) can borrow to fund their child's education. These loans are specifically designed to assist families in covering the costs associated with college or university. They can help bridge the gap between available financial aid and the actual expenses, such as tuition fees, room and board, textbooks, and other educational necessities. Parent loans play a vital role in ensuring that students have access to the education they desire, regardless of the family's current financial situation.
That said, it’s really important to understand how the different types of parent loans work, and how they currently fit into the financial landscape of college education.
As with student loans, parent loans are available to all parents as long as they meet the loan eligibility criteria. Parent loans are especially helpful in delaying the immediate costs of education for those who may not qualify for or may not be offered need-based grants or scholarships. Parent loans can come from federal or private lenders, and repayment periods vary, however there are generally two main timeframes in which parents can enter the loan repayment period, and, in the case of the Parent PLUS, the loan terms parents agree to are usually what dictate the repayment period, however they can be adjusted based on a change in your life or financial circumstances.
For private loans, terms can either be super flexible or quite inflexible, depending on the lender’s policies and whether/to what extent the lender determines the parent is credit-worthy. Repayment periods for private loans will be determined between the borrower and the lender on a case-by-case basis.
The first type of loan we’ll discuss is the Federal Parent PLUS Loan. These are only available to parents who are US citizens or Green Card holders; parents who are not US citizens or Green Card holders must utilize private lenders in their home country, or private lenders in the US who may require a co-signer. PLUS loans are one of the most common types of parent loans offered by US universities. They are funded by the U.S. Department of Education and administered by the financial aid office of the school the student is admitted to and decides to attend.
Since out-of-state students are not eligible for most need-based scholarships, a common theme at these schools is to offer the Parent PLUS to help these families meet any demonstrated need. However, that is kind of misleading because PLUS loans are unsubsidized, meaning they’re not based on financial need. So with parent loans that are not based on financial need, there are fewer limits; parents may borrow up to the Cost of Attendance, which could mean parents are borrowing anywhere from $20K-$60K each year their student is enrolled, depending on the gap between what the school has offered their student and what they can pay out of pocket during the university’s billing cycle. These amounts can add up quickly, especially with the current parent PLUS interest rate of 8.05%, plus a 4.228% loan fee that’s tacked onto each disbursement!
The Parent PLUS loan has an option which allows the parent borrower to either pay the interest as they go along, or defer the interest and allow it to capitalize once their student graduates. While payments can be deferred, this is not automatic; the parent must request deferment in writing during the application process.
Before we move ahead to the section on how to apply, let’s do an example calculation for a Parent PLUS loan based on a student case study. If you’d like to do this on your own and experiment with different amounts, we like this tool provided by NerdWallet.
The Montañez family’s eldest child, Jessa, has just been accepted to UC Berkeley. The family is thrilled, however, because Jessa’s home state is New York and not California, UC Berkeley did not offer Jessa any need-based scholarships. Jessa did win the Cal Alumni Association’s Achievement Award scholarship w/a one-time laptop stipend, however that only covers $6K/yr of the approximate $78K she’ll need to pay as a non-California resident.
In Jessa's financial aid letter, one of the things UC Berkeley offered Jessa’s parents was a PLUS loan in the amount of $75,200. Now wait, you say, 78,000 - 6,000 = 72,000. Why is the PLUS amount higher? It’s higher because of the origination fee, which is another way to say it’s the fee that folks must pay so they can borrow the loan money. If Jessa’s parents requested the exact amount they owe UC Berkeley, then the origination fee would subtract from that amount, and they would need to pay the difference out-of-pocket.
***Here’s how that calculation with the origination fee looks: ***
Loan amount recommended by school: $75,200
Origination/borrowing fee: 4.228% of the loan amount
75,200 x 0.04228 = 3,179.46
75,200 - 3,179.46 = 72,020.54
So $72,020.54 is the amount that will go to UC Berkeley to cover the remainder of the Montañez Family’s required contribution of $72,000. Any funds that are left over once all Jessa’s expenses are paid will show up as a credit in her student account, which she can use to cover personal expenses during the semester.
As to what the Montañez Family’s monthly payment amounts will be, that depends on the type of repayment plan they’ve chosen and is usually based on their family size and annual adjusted gross income.
We’ll assume they are a family of 4, whose combined annual gross (before tax) income is approximately 147,000. For federal repayment plans, no more than 10% of their discretionary income can be used. There are many different speeds at which parents can pay off a PLUS, and the Montañez family prefers to pay off the loan as quickly as possible so that the loan has less chance to accrue additional interest.
Here is what that repayment schedule would look like for a one-time loan of $75,200 on the standard 10 year term:
|Amount Borrowed||Origination/borrowing fee||Amount Student Will Receive for School Fees||Approximate monthly payment||Total Parents Will Pay Over the Loan Term|
Now, notice I specified that this is the amount for only one year. If Jessa’s parents need to borrow this amount for all 4 years, the only good bits of news are that the interest rate will be fixed at 8.05%, and parents can request a different payment plan which allows them to lower their monthly payments so they’re more manageable.
In addition to federal options, US banks like Wells Fargo and other lending organizations like SoFi and Earnest offer private parent loans for parents. Depending on individual eligibility, these can be lower interest alternatives to financing a student’s education. Private parent loans can either have fixed or variable interest rates. What this means is that the interest rate is either fixed and doesn’t move up or down over the life of the loan, or it is variable and will move within a specified range throughout the life of the loan.
Here are some benefits and drawbacks of both types from bankrate.com, which is a great explainer site for simple finance questions such as this:
|Fixed-Rate Loans||Variable-Rate Loans|
|Benefits||- Interest rate will never change - Monthly payments are consistent - Know exactly how much interest you’ll pay||- Lower starting rates - Benefit from market changes (in some cases) - Lower monthly payments if interest rates are low|
|Drawbacks||- Higher starting rates - No benefit if interest rates drop||- Rate can rise over time - Monthly payment can change|
In general, if you have a low income or a lot of expenses, fixed-rate loans may be better because there is less chance for the monthly payment amounts to rise to a point where they’re straining your finances.
If you have a higher income and/or qualify during the credit check for the lower interest rates, a variable rate loan might be better for you.
Be sure to check in with a financial advisor to see which is best for your family!
Applying for federal Parent PLUS Loans (or direct PLUS as they are sometimes called) involves a specific process that requires careful attention. Outlined below is the general process for applying or “requesting,” a PLUS loan, as it’s called by financial aid offices. From gathering the necessary documentation to completing the application form and understanding the associated timelines, parents will gain practical insights to help them better understand the application process.
1. Student must complete the correct year’s FAFSA. For students planning to enroll in the fall of 2024, they will need their parents’ financial information from 2022. This page will help families gather the necessary information to complete the FAFSA.
2. If the student was offered a Parent PLUS loan in their financial aid letter, the student must first accept the offer in their financial aid portal, or email the financial aid office to let them know they will accept it.
3. Use a Direct PLUS Loan Application to request a PLUS loan. Complete the application according to the instructions.
4. Complete a Direct PLUS Loan Master Promissory Note, which states (among other things) that the borrower understands the terms and conditions of the Parent PLUS they’re about to borrow, and what to expect once they submit the loan application.
5. Next, the Department of Education will send the requested loan amount, and the additional information the parent provides as part of the application, to the school where they want to use the PLUS. The school will use that information to determine the parent’s eligibility for the Direct PLUS Loan and will tell them what loan amounts, if any, they are eligible to receive.
6. If the parent is eligible to receive the amount requested, it will appear in their student’s account once all the application materials are processed, and then the financial aid office will apply the appropriate amount to the student’s bill.
7. If the borrower would like to change or cancel the PLUS loan, they need to do so within a specified time frame once the semester begins but before the disbursement date, depending on the school and federal policy.
8. Parents should be in close contact with their school’s financial aid office so that everything can go as smoothly as possible.
|Access to immediate funds||A minimal/unofficial credit check, which can allow parents with poor credit to borrow thousands of dollars they might not be able to pay back later on.|
|No borrowing limits||Few borrowing limits, making it easy to build up debt more quickly.|
|Potential tax benefits||Interest that accrues over time; even if parents can delay paying that interest, it still gets added on top of the actual amount they borrow, making it more difficult to pay off quickly.|
|For federal parent PLUS loans: - fixed interest rates, - flexible repayment options, - release from family’s obligation to pay in the event of death or disability of the borrower, and - the potential to qualify for Public Service Loan Forgiveness, for parents who are employed by certain government or non-profit organizations.||All repayment responsibilities fall on the parents; transferring the debt to children is not allowed.|
|The negative impact that borrowing high amounts of money can have on the parents' credit history, especially if the parents don’t earn very much income in comparison to the amount of loans they borrow.|
In conclusion, navigating parent loans is a crucial step in financing your child's education. While loans may not be the best option for every family, they can help bridge the gap between available financial aid and the actual expenses of college or university.
It's important to evaluate your financial situation, including income, expenses, and credit history. Consulting with a licensed financial advisor can provide valuable insights and help you make an informed decision.
At the end of the day, the main goal is to help your student access a top-notch education while keeping your finances in check. By weighing the pros and cons, and getting some expert advice, you can better understand the world of parent loans and make the best decision for your family's future.
Please note, unless otherwise indicated, Crimson Education Financial Aid Mentors and others who write about loan options on this website are not certified wealth management professionals. This article, and/or any 1:1 advising your student may receive from us, is meant to provide information on what is possible. Eligibility for any of these loans or other funding opportunities that require borrowing must be determined on an individual basis, under the advice of a certified professional.