How College PLUS Loans Might Help To Close The Gap In Education Funding
Although student PLUS loans are perhaps not strictly student loans since they are made to parents, PLUS loans are nonetheless a very important tool in assisting to narrow the gap between the cost of college and the money available through other loans to students.
With the climbing cost of education over the past few years students who have relied on traditional Stafford loans have repeatedly found that they do not cover the majority 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 sum available from college loans and the actual cost of education.
Though the interest rate for PLUS loans is greater than other types of loan the cap on borrowing is far more flexible and the loans are not need-based.
For the FFEL program (Federal Family Education Loan) for which funds are provided by private lenders the interest rate is presently 8.5% and loans funded through the US Department of Education under the Direct loan program are presently charged at 7.9%. This difference of just 0.6% might appear inconsequential but can turn out to be substantial over the lifetime of an average loan.
With PLUS loans parents are allowed to borrow up to the full cost of education minus any other financial aid amount that the child is receiving. Although PLUS money is not cheap it can often make a difference when deciding which college to attend or whether to attend at all.
However, because PLUS loans are not need-based, they do require a credit check before approval. Normally it is of course the parent's and not the student's credit which is checked since the parent is the signatory to the promissory note and is responsible for meeting repayments on the loan.
Where the credit history of the parent makes him or her ineligible for a PLUS loan a co-signer can come into play and a relative or other third party can agree to guarantee the loan repayment and assume legal responsibility as a co-borrower. With recent problems in the sub-prime borrowing arena however such cases are unfortunately less rare than they once were. This means that in borderline cases the need for a co-signer is more likely.
Aside from changes in interest rates another recent change to the program is the fact that it has been extended to permit graduate and professional students to qualify for PLUS loans. The same eligibility criteria and interest rates apply and they need to be enrolled at a suitable institution and on an eligible program.
Different from many college loan programs, repayments on a PLUS loan starts immediately and the initial payment is typically required within 60 days of the loan monies are disbursed. Interest starts to build up from the moment the first payment is made and both interest and principal has to be paid in regular monthly installments while the student is in college. Payments have to be made to the private 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 calculate all the costs of obtaining a PLUS loan carefully and look on it as a loan of last resort. Even something like a home equity loan may well be cheaper as the interest payments are tax-deductible.
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