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What Parents and Students Should Know Before Applying for Direct PLUS Loan

When it comes to paying for college, the various types of financial aid available can look confusing at first glance. Don’t worry, you are not alone. 

If you are taking out a loan, it’s especially important to know all the criteria for each type of loan before you end up in debt for the rest of your life. There are four types of loans, according to Federal Student Aid: direct subsidized loans, direct unsubsidized loans, direct PLUS loans, and direct consolidation loans. 

The loan to watch out for: Direct PLUS loans, also known as parent PLUS loans or grad PLUS loans. They are a little more complicated and have their pros and cons. 

What are direct PLUS loans?

If a parent of a dependent student is taking out a Direct PLUS loan, it’s also called parent PLUS loans. For undergraduate, graduate and professional students it’s called a grad PLUS loan. The U.S Department of Education is your loaner and you are required to make payments as soon as the money is disbursed. 

All students have to apply for the Free Application for Federal Student Aid (FAFSA) first, then complete a different form to apply for direct PLUS loans. But before you apply, here are some main details you need to know before taking out this loan:

Pros: 

It’s easy to qualify for the loan and you can take as much as you need. All direct PLUS loans are not based on financial need, but on a credit background check. Parents and students with adverse credit history can still manage to get the loan if they complete additional steps and they can take out up to the cost of attendance. 

There is a fixed interest rate. Borrowers have a fixed interest rate of 7.08 percent for the life of the loan.

The length to repay the loan can be extended. Direct PLUS loans qualify for three different payment plans that can help you extend the life of your loan for up to 30 years: standard repayment plan, graduated repayment plan, and the extended repayment plan. Keep in mind that interest builds up even if you are not paying. 

Cons:

There is an additional fee for taking out the loan. In addition to the amount of the loan, you also have to pay an additional 4.248 percent loan fee if you applied after October 1, 2018, and before October 1, 2019. It slightly increased from the 4.236 percent loan fee if applied after October 1, 2019, and before October 1, 2020. 

It is not available for income-driven payments. Direct PLUS loans are also the only loans that are not available for income-driven payments, so when the interest rate is fixed, monthly payments may actually be higher for low-income families

The responsibility to repay the loan can not be transferred. For parent PLUS loans, the parent cannot transfer the responsibility of payment to their child. This means that the parent can be stuck paying for the loan for about 30 years and if they hit retirement, they can get stuck paying for a loan they cannot afford.

Direct PLUS loans can affect families of color the most

According to New America, direct PLUS loans are catered to white middle and upper-class families who earn more than $75,000. Their children attend public or private four-year institutions making the fixed interest low for these families. 

As a result, loan debt from direct PLUS loans is creating intergenerational debt for families of people of color. Parents and students will be stuck paying off their loan debts, making it hard for future generations to get their family out of debt. 

How can direct PLUS loans be better? 

A few changes to the current rules of direct PLUS loans can make it easier for families to pay off their student loans. For one, they can limit parent PLUS loans to the student’s expected family contribution. Instead of just doing a credit check, lenders need to concentrate more on the family’s ability to pay back the loan. 

It’s important to know every detail before taking out a loan. Before taking out a Direct PLUS loan, remember there are many restrictions. 

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