How PLUS Loans For College Can Be Used To Close The College Funding Gap

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With the climbing cost of education in recent years students depending on traditional Stafford loans have regularly 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 provided by college loans and the cost of education.

Although the interest rate is greater than that for other types of loan the ceiling on borrowing is considerably more flexible and the loans are not need-based.

In the case of the FFEL program (Federal Family Education Loan) for which private lenders provide the funds the interest rate is presently 8.5% and loans provided by the US Department of Education under the Direct loan program are presently charged at 7.9%. The difference of 0.6% may look inconsequential but can prove significant when viewed over the lifetime of the average loan.

With PLUS loans parents are allowed to borrow up to the full cost of a child's education minus the amount of any financial aid that the child is awarded. Though PLUS money is not cheap it can often make a difference when choosing which college to attend or whether to attend at all.

However, as PLUS loans are not need-based, they do require a credit check before approval. Generally it is the parent's rather than the student's credit which is checked since the parent is signing the promissory note and will be responsible for meeting repayments on the loan.

Where the parent's credit history makes him or her ineligible for a PLUS loan a co-signer can be brought into the equation and a relative or other party can guarantee the loan repayment and assume legal responsibility as a co-borrower. With recent difficulties in the area of sub-prime borrowing however such cases are more common than they used to be. This suggests that the requirement for a co-signer is more likely in borderline cases.

Aside from changes in interest rates another recent change to the program is its extension to allow graduate and professional students to obtain PLUS loans. Identical interest rates and eligibility criteria apply and they have to be enrolled at an appropriate institution and on an eligible program.

Unlike many college loan programs, repayment of a PLUS loan begins immediately and the first payment is typically required within 60 days of 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 during the time that the student is in college. Payments need to be made to the specific lender in the case of FFEL loans and to a US Department of Education servicing center in the case of Direct loans.

It is important to work out the costs of obtaining a PLUS loan carefully and view it as a loan of last resort. Even a home equity loan may turn out to be less expensive because the interest payments are tax-deductible.

About the Author

TheStudentLoansCenter.com provides information on all aspects of college loans and grants and provides details of student PLUS loans

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