After families of graduating seniors complete their FAFSA, hopefully soon after October 1 when the FAFSA opens, a financial aid package from the colleges the student has been accepted to should follow. In theory, these packages should cover the student’s cost of attendance at the school the student chooses to attend. In theory. So, what happens when it doesn’t? How can a family put together the money they will actually need to send their senior to college?
For most, the answer to this question will be a Parent PLUS loan. Parents can apply for this through the federal government after the student receives their financial aid package and if they calculate a shortage of needed funds there. As you might expect, there are some key differences between the Parent PLUS loan and the Stafford loan which is the more common type of loan that will likely already be a part of the financial aid package. Perhaps the biggest difference is that the Stafford loan is tied to the student, the Parent PLUS loan is tied to the parent. So, at the end of the day, those are different people on the hook for repayment.
Students don’t have to pass a credit check to be eligible for a Stafford Loan but Parent PLUS applicants do. If the parent fails that check, the student can talk to their financial aid office about increasing the amount of their loan. That request is usually granted. It is important to note too that Parent PLUS loans come with a fixed interest rate and a few options for repayment terms ranging from 10 years to 25 years as well as an income-based option. The repayment starts immediately though, whereas students don’t have to begin repayment of their Stafford loan until six months following their graduation. Stafford loans may or may not be subsidized as well. If they are, the loan won’t accrue interest while the student is in school which can significantly reduce the overall cost of the loan. A Parent PLUS loan is never subsidized. Lastly, Parent PLUS loans carry a 4% origination fee. That’s something Stafford loans don’t have.
In short, the Stafford loan is a better deal than the Parent PLUS loan. The terms are always going to be better and cheaper. Also, Parent PLUS loans are where the amount of loan debt can spiral out of control. Remember, what’s in the financial aid package ought to cover the cost of attendance. If it doesn’t, a family would do well to examine their budget and see if there are changes or cuts that can be made. As a college recruiter once told me, sending your child to college shouldn’t come without some expectation of sacrifice or change to lifestyle. If you can’t find a way to do that, you may well need to borrow money to better your child’s future. As those repayments come due, what will that mean to your future lifestyle? Parent PLUS loans can be the bridge between a financial aid package and a college education for your child. That’s a good thing, but be careful with them.
