How Much Will I Pay on a PLUS Loan?

By Markets Fool.com

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PLUS and Parent PLUS loans have fixed interest rates and qualify for forgiveness programs, making them an excellent choice for college students and parents alike. How much you'll pay on a PLUS loan depends on how much you borrow, when you borrow it, and how long you take to repay it.

Here are some variables that affect your payments, and an easy-to-use calculator to estimate what your loan will cost you.

Fixed interest rates for 2016 and 2017

Congress decided to allow PLUS loan rates to reset once a year in 2013, based on the interest rate the U.S. Government pays to borrow for 10 years plus 4.6 percentage points.For the 2016 to 2017 academic year, the rate is 6.31% on PLUS loans first disbursed on or after July 1, 2016, but before July 1, 2017. The rate is fixed for the full life of the loan, even if interest rates rise or fall in the future.

A calculator for how much you'll pay on your PLUS loan

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The calculator below can help you determine how much you'll pay on your PLUS loan. There are a few things you should know before you use it.

When it comes to the interest rate, the current rate of 6.31% is probably a safe bet. It's possible that rates will be higher or lower on loans issued in future years, but predicting rate fluctuations is tricky, if not impossible. As a rough rule of thumb, consider that, over the last three years, rates were as high as 7.21% and as low as 6.31%.

Second, it's probably a good rule to stick to the standard number of months for loan repayment -- 120 months, or 10 years. In some circumstances, PLUS loans can be repaid over 20 or 30 years, depending on a number of largely unknowable factors that include your income after graduation.

Third, standard terms call for minimum loan payments of $50 per month. If the calculator returns a lower number, your payment will be $50 per month, albeit for a shorter period of time than the full length of the loan.

If you already have PLUS loans and want to see how different repayment choices will affect you, log into your account on the U.S. Department of Education website. It will calculate repayments based on your actual amount borrowed for each type of loan currently outstanding.

Origination fees add to the total cost

Interest is just one price of borrowing money. PLUS loans also carry one-time origination fees equal to a percentage of the amount borrowed, which are deducted from the amount disbursed to you.

Dates for Loan Disbursement

Origination Fee

Disbursement Net of Fees on a $1,000 Loan

Before Oct. 1, 2016

4.272%

$957.28

On or after Oct. 1, 2016 and before Oct. 1, 2017

4.276%

$957.24

Source: Ed.gov.

Origination fees are an important consideration when deciding how much to borrow. If you don't account for the fee, you may borrow too little to fully meet your needs. Borrow too much, however, and you'll end up paying an origination fee to borrow money that you didn't necessarily need.

Getting a lower rate than a PLUS loan

The truth is that PLUS loans are a relatively expensive way to borrow. Subsidized and unsubsidized loans, as well as need-based Perkins loans, are less expensive. Maximize your borrowing through these programs before turning to a higher-cost PLUS loan.

Private loans can be enticing, but tread carefully. A number of lenders offer private loans with fixed rates of 4% or less, but private loans generally do not offer the same kind of protections as government loans.

Private student loans don't qualify for Public Service Loan Forgiveness, income-driven repayment plans, or forbearance to pause payments on your loan if you find yourself in a really tight financial spot. Furthermore, private student loans have more stringent underwriting requirements -- good credit and income is important.

The biggest advantage of federal loans is that they're less likely to require a co-signer,meaning that the borrower's inability to repay a loan in his or her own name won't be the problem of someone else -- parents, grandparents, or friends -- who co-sign on the loan.

For this reason, a slightly higher rate on a federal loan is, perhaps, best viewed as an insurance policy against future financial hardship, rather than an unnecessary and costly burden for students and their parents. Besides, if all goes to plan, you can always refinance a higher-cost federal loan into a lower-cost, but higher-risk, private loan after graduation.

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