Borrowing for college? Four things to know about PLUS loans
As a parent, you want to do what’s best for your child. You’ve set aside savings for college, supported their goals, and helped them through the decision process. But even with scholarships and student loans, you still don’t have enough. You do have options.
One of these is Direct PLUS loans. PLUS loans are offered by the federal government to the parents (biological, adopted, or, in some cases, the stepparent) of dependent students who are enrolled in a college, university, or other higher education program at least half time.
They’re quickly rising in popularity. While the parents’ portion dwarves the whopping $1.56 trillion their children owe in student loans,1 PLUS loans now total $100.8 billion, a 42% increase from just six years ago.2
Although they do provide a viable financing option for some families, there are a number of considerations that you need to be aware of before considering this type of loan.
- PLUS loans have higher interest rates than student loans. The interest rate for PLUS loans is currently 5.30%—nearly double the student loan rate of 2.75%. That means for every $10,000 borrowed, you can expect to pay an extra $3,227 in interest over a 20-year repayment period. What’s more, PLUS loans have origination fees, which are additional loan processing and setup charges. As of October 1, 2020, the origination fee is 4.236%.2
- There is almost no cap on the amount you can borrow. While there is a cap on student loans, parents can borrow any amount, up to the cost of attendance minus any financial aid the student receives. For example, if the cost of the school is $35,000 and your child is set to receive a total of $12,500 in scholarships and student loans, you could borrow up to $22,500 for that school year.
- You can’t simply transfer the debt over to your child. As the signer of the loan, it legally belongs to you. You can’t incorporate it into any student loans your child may have. You could work out a separate repayment program where your child pays you directly. Be sure to discuss this possibility with your child before agreeing to any loan.
- Your options are limited if you can’t repay. While the CARES Act provides relief to both student and PLUS loan borrowers through September 30, 2021, you need to have a plan for when that program ends. You can apply for a deferment or forbearance with the loan servicer. Many offer income-driven repayment plans.
Before making any decisions on your child’s college plans, check in with your financial professional, who can help you determine which funding options may make the most sense to your situation.
Important disclosures
1 “Quarterly Report on Household Debt,” Federal Reserve Bank of New York, February 2021. 2 Studentaid.gov, 2021.
This material does not constitute financial, tax, legal, or accounting advice, is for informational purposes only, and is not meant as investment advice. Please consult your tax or financial professional before making any decision.
The opinions expressed are those of John Hancock Investment Management as of February 2021 and are subject to change.
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