Written By Caitlin See
If you need help paying for your child’s education or if you’re pursuing graduate school for yourself, you may come across the Federal Direct PLUS Loan Program.
Direct PLUS loans allow graduate students and parents to borrow up to the full cost of attendance. But they also typically come with higher interest rates and loan fees compared with other federal loans. And for parents, PLUS loans have limited loan repayment and forgiveness options.
Here’s everything you need to know about taking out Direct PLUS loans.
What is a Direct PLUS loan?
Direct PLUS loans fall within the William D. Ford Federal Direct Loan Program and are designed to help students pay for education expenses that aren’t covered by other financial aid options.
The PLUS loan program was expanded in 2006 as a solution to help more people access higher education. Because Direct Stafford loan limits have historically been capped at relatively low amounts, the expansion was a way to bridge the gap between how much college cost and how much students could take out in federal student loans.
There are now two different types of Federal PLUS loans:
- The Direct Parent PLUS Loan is available to the parents of qualifying dependent undergraduate students.
- The Direct Grad PLUS Loan is available to graduate and professional school students.
PLUS loans aren’t designed to be need-based, so borrowers of all income levels and financial situations are eligible to apply.
Features of a Direct PLUS loan
PLUS Loans have an annual loan limit equal to the full cost of attendance as determined by the school minus any other financial aid that is received. But there isn’t an aggregate loan limit to help prevent borrowers from taking out an unmanageable amount of debt.
So, parents and students should consider key features of the PLUS loan and evaluate whether there is a true financial need before signing on the dotted line.
PLUS loans are unsubsidized
Direct PLUS loans are considered unsubsidized loans, which means they begin accruing interest as soon as they are disbursed.
This point is a key difference compared with a subsidized loan, for which the federal government would cover the cost of interest until you entered the repayment phase.
Accrued interest can have a big impact on your overall debt because it will be capitalized and added to your loan principal when you enter your repayment period, causing your outstanding debt to balloon and grow even faster.
Direct PLUS Loan interest rates and fees
Due to the recent economic downturn, both undergraduate and graduate students will be able to benefit from some of the lowest student loan interest rates on record.
The Direct PLUS loan interest rate is fixed at 5.3% for the upcoming 2020-2021 academic year. The new rate makes the loan much more affordable for new borrowers than in recent years when rates climbed to over 7%.
| Loan type | Interest rate | Loan fee 10/1/18 to 10/1/19 | Loan fee 10/1/19 to 10/1/20 | Loan fee 10/1/20 to 10/1/21 | Loan fee 10/1/21 to 10/1/22 | Loan fee 10/1/22 to 10/1/23 |
|---|---|---|---|---|---|---|
| Parent PLUS | 5.30% | 4.248% | 4.236% | 4.236% | 4.236% | 4.236% |
| Grad PLUS | 5.30% | 4.236% | 4.236% | 4.236% | 4.236% | 4.236% |
But the rate isn’t the only cost borrowers should consider.
PLUS loans carry around a 4.25% origination fee, which is then calculated based on the loan amount and deducted from each disbursement.
In contrast, other available federal loans — like Direct Stafford subsidized and unsubsidized loans — only have about a 1% origination fee.
Because PLUS Loans include unsubsidized interest and higher origination fees, they should only be used to fill necessary financial gaps.
How to apply for a Direct PLUS loan
PLUS Loans require an additional application outside of filing a Free Application for Federal Student Aid (FAFSA). Most schools will have you complete a PLUS Loan application online at Studentaid.gov, but some may have a different application process. It’s best to check with your college financial aid office for additional guidance.
An adverse credit history could prevent you from qualifying, but there are exceptions for extenuating circumstances. Virtually any borrower can qualify if you complete PLUS Credit Counseling and either appeal the denial decision or apply with a creditworthy cosigner.
If you’re denied as the parent of a dependent undergraduate student, the loan limit for your child’s eligibility for unsubsidized Stafford loans will increase to that of an independent undergraduate student. So, you’ll need to weigh which loan option will benefit your family more in the end.
Be aware that you won’t be able to transfer your Parent PLUS loan into your child’s name later down the road unless you both choose to refinance it into a private loan under his or her name. Discuss a clear plan with your student about who is responsible for payments before you take out a loan or refinance one.
Repayment options and loan forgiveness for PLUS loans
Grad PLUS loans qualify for various repayment options, including income-driven repayment (IDR) plans like:
- Revised Pay as You Earn
- Pay As You Earn
- Income-Based Repayment
- Income-Contingent Repayment
The repayment period for Grad PLUS loans begins six months after you graduate, leave school or your enrollment falls below half-time. Parent PLUS Loans, however, are only eligible for the Standard Repayment Plan, Graduated Repayment Plan and Extended Repayment Plan.
Direct PLUS loan forgiveness options
Although PLUS loans may provide the funds necessary to attend college, they usually end up being much more expensive than other financing options due to their higher rate of interest accrual and hefty loan fees. To manage this cost, borrowers with a large amount of debt should consider loan forgiveness as part of their overall debt repayment strategy.
Forgiveness programs include:
- Public Service Loan Forgiveness. Borrowers who work in the public or nonprofit sector may be eligible to have their loans forgiven after 10 years of qualifying payments.
- Loan forgiveness with an IDR plan. With this strategy, your loans are typically eligible for forgiveness after 20 to 25 years of qualifying payments under an IDR repayment option.
- Various state and professional loan forgiveness programs. You may be able to qualify for partial loan forgiveness depending on where you live and what type of work you do. Some states or other entities offer forgiveness in exchange for fulfilling a work contract in an underserved area.
Federal forgiveness programs are only eligible to student borrowers, not Parent PLUS loan borrowers.
Direct Parent PLUS loan caveats
Direct Parent PLUS loans are treated differently than Grad PLUS loans. To start, there isn’t an automatic grace period for Parent PLUS loans, so repayment will begin immediately unless you request deferment while your child is in school.
Additionally, Parent PLUS loans aren’t eligible for IDR plans or student loan forgiveness programs. But there is currently a loophole for Parent PLUS loans.
If you consolidate your Parent PLUS Loans into a Direct Consolidation Loan, you can access an additional repayment plan — the Income-Contingent Repayment Plan — and then potentially become eligible for loan forgiveness.
Related: How to Strategically Choose Which Parent Should Apply for Parent PLUS Loans
Other types of student loans
Because of the more expensive nature of Direct PLUS loans, you should explore other financial assistance options first.
Look into scholarships, grants, fellowships and work-study. You also might qualify for other student loan options such as:
- Federal Direct Stafford Subsidized Loans. Graduate students and parents aren’t eligible, but undergraduate students may qualify based on their financial need.
- Federal Direct Stafford Unsubsidized Loans. Undergraduate and graduate students may be eligible regardless of financial need.
- Private student loans. Shop around and compare the loan terms and interest rates of at least three lenders’ student loan products.
In the end, it may make sense to take out a PLUS loan if you’ve considered other options and only need to come up with a manageable amount of debt to finance your or your child’s higher education.
If you aren’t sure which route to take, sign up for a pre-debt consultation for customized guidance.
Not sure what to do with your student loans?
Take our 11 question quiz to get a personalized recommendation for 2024 on whether you should pursue PSLF, Biden’s New IDR plan, or refinancing (including the one lender we think could give you the best rate).
The repayment period for grad PLUS loans can be started during school as well even if you are full time.
I have a parent plus loan that began in 2006. I am 68 years old and soon to retire and live off of social security. I see that IDR are not available for me. I currently pay $361 a month to Navient and will be unable to do so when I retire. What are some options for me? I really need help with this.
I encourage you to book a consult to get a custom plan – there are ways to lower your monthly payment and qualify for other IDR plans (it’s the Double Consolidation Loophole for Parent Plus Loans). Otherwise, the ICR or Income Contingent Repayment plan should be available to you, but that’s a higher portion of your income compared to other IDR plans.