Many parents who are taking out Parent PLUS loans want to know who is in charge of making the loan repayments. There are very specific rules that dictate who must repay the debt, so is it solely the parent’s responsibility or can the student take it on?
Reason 1: No Credit Check or Cosigner for Federal Student Loans
The fact that federal student loans—both subsidized and unsubsidized—don’t require a cosigner or a credit check is one of their main benefits. For those who are just starting out and might not have a credit history yet, this is a huge benefit.
The credit history of students is not taken into account when they apply for federal student loans. This implies that your child can still be eligible for a federal student loan even if they have no credit history or a low credit score. This isn’t always the case with private student loans, though, as they frequently call for a credit check and, in the event that the borrower doesn’t have enough credit history, a cosigner.
In addition, federal student loans do not require a cosigner. Someone who consents to repay a loan in the event that the borrower is unable to do so is known as a cosigner. A cosigner’s finances are at risk even though they may help a student get a private loan or an interest rate reduction. The cosigner is in charge of repaying the loan if the student is unable to make the payments.
However, since Parent PLUS Loans are credit-based, your credit will be examined and may be negatively impacted. If your credit history is not favorable, you might need to apply with an endorser, which is akin to a cosigner, or submit supporting documentation to the U S. Department of Education explaining your adverse credit history. This can take longer and be more complicated than applying for a simple federal student loan.
Subsidized vs. Unsubsidized Loans: What’s the Difference?
The only undergraduate students who can apply for direct-subsidized loans are those who have financial need. The maximum amount you can borrow is decided by the school and cannot be greater than your immediate needs. The U. S. The interest on a Direct Subsidized Loan is covered by the Department of Education while you are enrolled in classes at least half-time, for the first six months following your departure from school (called the grace period), and during deferment periods.
On the other hand, from the time of disbursement until the loan is paid in full, borrowers of Parent PLUS Loans and Direct Unsubsidized Loans are in charge of paying all interest that accumulates on the loan. This covers the time the student is enrolled in classes, the grace period, and any periods of deferment or forbearance. This may result in a considerable rise in the loan’s total cost, making it a more costly choice overall.
Your family can save thousands of dollars in interest by taking out Direct Subsidized Loans instead of an unsubsidized option, making this a more economical way to pay for college.
Parent PLUS Loans Have Fewer Repayment Plan Options
There are several different repayment options available for federal student loans that borrowers take out for their own education, including income-driven repayment plans that can help manage monthly payments after graduation. The monthly loan payment under these plans is determined by the borrower’s income, family size, and state of residence. Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR) are the four forms of income-driven repayment plans. These plans have the potential to drastically lower monthly loan payments, and any remaining loan balance is forgiven after a predetermined amount of time (often 20 to 25 years).
On the other hand, Parent PLUS Loans do not provide as many options for repayment. With the exception of the Income-Contingent Repayment (ICR) plan, they are not eligible for the majority of income-driven repayment plans. Nevertheless, Parent PLUS Loans must be combined into a Direct Consolidation Loan in order to be eligible for the ICR plan. The payments under the ICR plan are determined by taking the 2020% of your discretionary income or what you would pay under a repayment plan with a fixed payment over 2012 years, adjusted based on your income, whichever is less. After making qualifying payments for 25 years, the loan balance is forgiven.
Parent PLUS Loans are eligible for the Standard, Graduated, and Extended Repayment Plans in addition to the ICR plan. Over a ten-year period, the Standard Repayment Plan has a set monthly payment. Over a ten-year period, the Graduated Repayment Plan begins with smaller payments that rise every two years. For a 25-year period, the Extended Repayment Plan provides either fixed or graduated payments.
While these choices offer some flexibility, they fall short of the income-driven repayment plans available for federal student loans taken out by students for their own education in terms of affordability and loan forgiveness.
Parent PLUS Loans Have Higher Interest Rates
Interest rates are another important factor to consider. Generally speaking, parent PLUS loans have higher interest rates than federal student loans for students. This implies that if you take out a Parent PLUS Loan instead of a student’s federal student loan, you may wind up paying a lot more interest over the course of the loan.
To illustrate this point, let’s look at some historical interest rates. According to data from Savingforcollege.com, the interest rate for Parent PLUS Loans for the 2020-2021 academic year was 5.30%, while the interest rate for Direct Subsidized and Unsubsidized Loans for undergraduate students was significantly lower at 2.75%.
The entire amount repaid over the course of the loan may differ significantly as a result of this difference in interest rates. For example, a $10,000 loan at a 5. Over the course of ten years, a 30% interest rate repayment would equate to about $3,000 in interest payments. The same loan amount at a 2. The interest rate of 75% would yield approximately $1,500 in interest payments. That’s a $1,500 difference just because of the interest rate.
Lastly, it’s critical to take legal responsibility for loan repayment into account. Repaying a Parent PLUS Loan is legally the parent’s responsibility. You might promise your child that they will pay back the loan, but you will still be accountable if they don’t. Because federal student loans are student-only, they can teach valuable lessons about financial responsibility.
Making the Right Choice
Parent PLUS loans aren’t always the best option when it comes to helping pay for your child’s education, but they can be a helpful tool. Many benefits come with federal student loans, such as no credit check or cosigner requirements, the potential for subsidized interest, a greater number of repayment options, reduced interest rates, and the opportunity to teach your child financial responsibility. If parent PLUS loans are required to supplement federal student loans in order to cover the entire cost of attendance, do so.
Remember, every family’s situation is unique. To make the best choice for your family, it’s critical to weigh all of your options and speak with a financial advisor or the college financial aid office.
Thus, begin with your child obtaining a federal loan of their own. In the long run, this choice might save you stress and money.
FAQ
Is a child responsible for a parent PLUS loan?
Repaying a Parent PLUS loan is legally the parent’s responsibility. Even if you and your child agree that they will pay back the loan, you will still be accountable for it if they don’t.
Who is charge of paying the parent PLUS loan?
Is it possible for me as a parent PLUS loan borrower to assign my child the burden of repaying the loan? No, a Direct PLUS Loan granted to a parent cannot be assigned to the child. It is legally your responsibility as the parent borrower to repay the loan.
Is my spouse responsible for my parent PLUS loan?
However, in terms of student loan debt and divorce, it is usually the debtor’s responsibility to make loan payments, even after a divorce. In the event of a divorce, the spouse who is able to sign the promissory note for a Parent PLUS loan is the one who is legally in charge of the student loan.
What happens if parents don’t pay parent PLUS loans?
Options for a repayment plan will be lost, and the clock on PSLF and other forgiveness programs will start over. You can learn more about the consolidation process here . Act quickly to avoid default. Consequences for defaulting include having your federal tax return, Social Security, or wages garnished.
Read More :
https://studentaid.gov/understand-aid/types/loans/plus/parent
5 Reasons Your Child Should Take Out Federal Student Loans Before You Consider Parent PLUS Loans