Summer is student lending season, as many are preparing to handle bill payment leading up to the new fall semester. This can be a stressful time for parents managing an outstanding balance for college, especially if it’s a larger bill than hoped for.
Even after scholarships and financial aid are made available, it’s not uncommon for families to rely on a Parent Plus loan to supplement the remainder of the bill. Here are a few key things to consider when applying.
Interest Rate: For the 2016-2017 year, Parent Plus carries a 6.31%. This is actually a lower rate when compared to prior years in this federal program. It’s also a fixed rate loan meaning that the rate will not go up or down. There has been ongoing discussion about the pros and cons of fixed rate loans given the very low interest rate environment of the past several years. While locking in a fixed rate provides the security of a very predictable repayment process, if the fixed rate is rather high, it also guarantees the interest costs during repayment. It’s a matter of personal preference, but Parent Plus is only using a fixed rate.
Origination Fee: 4.276% This is an area of concern as a 4.276% origination fee seems pretty high for most consumers, especially when compared to other financial products. (Imagine if a mortgage had a similar fee…) The fee is taken out of the gross loan amount, actually reducing the loan disbursement to the school. So if you apply for a $10,000 disbursement in the Fall semester, $427.60 is deducted from the amount, leaving $9,572.40 to pay the account.
Credit Criteria: The only requirement is that the parent borrower not have “adverse credit history.” This is defined as not having any 90+ day delinquencies on more than $2,085 in debt and not having any loan defaults, bankruptcy discharges, foreclosures, repossessions, tax liens, wage garnishments or had a federal student loan write-off during the past five years. This allows for many to gain approval for the Parent Plus loan, as the application approval does not depend on the borrowers actual credit score or debt-to-income ratio.
Who is the lender? The lender is the Department of Education through the Direct Loans Program. This is a government based student loan program.
What happens if denied? When a parent is denied for Parent Plus, the student becomes eligible for an increase in Direct Unsubsidized Loans in the amount of $4,000 for freshman and sophomores and $5,000 for juniors and seniors. Immediately inform the office of financial aid of the circumstances to coordinate the increased direct loan in the student’s name. This has been an especially helpful way for some students to gain additional funding to cover a small balance when necessary.
More Parent Plus Tips:
Run a loan repayment calculation to estimate costs: It’s always a good idea to be aware of of future loan payments to make sure they fit in the budget. For example a $10,000 Parent Plus loan at 6.31% would require monthly payments $112 and cost about $3,509 in interest. If your a parent of a new freshman, take those figures and project them over the next 4 years. You can quickly estimate about $40,000 in total loan disbursements, about $450 per month in payments and about $14,000 in total interest over total repayment, and that’s if the interest rate stays at 6.31%. Remember to always look at the big picture of debt and consider what’s needed for the whole education, not just one year.
Increase the Parent Plus loan amount to compensate for origination fee: As noted earlier, the origination fee is deducted from the gross loan amount, reducing the actual disbursement to the school. If using Parent Plus, make sure to increase the loan amount so that it can still cover the bill even after the fee is removed. This avoids an end of semester problem of having an unpaid balance that everyone thought would be covered by the Plus Loan. Some families end up scrambling for an extra $500 in cash just to pay that bill and get cleared for next semesters registration. Instead, make it easy and apply for a larger loan. If the school receives more loan money than needed, they can send the excess in the form of a refund check to the parent, and they can then make a payment to Direct Loans to lower the loan balance.
Compare to private loans or home equity: You have options. Private loans are provided by banks and financial institutions and may offer an appealing program for some families. They do have more stringent credit standards using the student as a primary borrower with a parent as a cosigner to establish approval. Some families prefer the private loan because it allows the parent the opportunity to utilize a cosigner release from the application once the student borrower makes a certain number of on-time payments after graduation. Not all lenders offer cosigner release, so pay close attention and compare during your application process. This differs from Parent Plus, that remains only in the parent name until repayment is achieved. Home equity is another option for some families, especially where low rates can be made available. This should be handled with care, as putting up home equity comes with it’s own unique risks as well. Additionally, the debt would only remain with the original parent borrower, there would be no easy way to transfer the total debt back to the student like in a private loan with cosigner release.