Parent PLUS loans: Who qualifies and how to refinance them

Looking for a way to pay for your kid’s college costs without taking out private student loans? A Parent PLUS loan could be a great option.

In a nutshell, a Parent Loan for Undergraduate Students (PLUS) is a federal loan that’s issued to the parents of a college student. In turn, the parents are the borrowers, and they’re responsible for repaying the debt, not the student.

Parents who apply for PLUS loans can borrow money to cover any college costs, up to the full cost of attendance, that are not already covered by a student’s financial aid package.

Parent PLUS loans have a fixed interest rate, and borrowers must pay a loan origination fee, both of which depend on when the loan is issued. (PLUS Loans disbursed for the 2019-2020 academic year have an interest rate of 7.08 percent and an origination fee of 4.236 percent.) Typically, Parent PLUS loans have higher interest rates and fees than federal subsidized loans and private student loans.

BEST STUDENT LOANS FOR PARENTS: PLUS VS. PRIVATE

Legal guardians are not eligible for Parent PLUS loans—the borrower must be the biological parent or stepparent of the student. Also, parents who apply for PLUS loans cannot have an adverse credit history, which is defined as having "one or more debts with a total combined outstanding balance greater than $2,085 that are 90 or more days delinquent as of the date of the credit report, or that have been placed in collection or charged off (written off) during the two years preceding the date of the credit report according to the U.S. Department of Education."

The exception? Parents that have an adverse credit history may still be able to qualify for a PLUS loan by obtaining an endorser (similar to a cosigner) who has good credit or by documenting the extenuating circumstances, such as a job loss, related to their adverse credit history.

WHAT ARE NO-LOAN COLLEGES

Repayment for Parent PLUS Loans typically begins 60 days after the funds are fully disbursed, for a term of up to 10 years. However, parents can request to defer payments while their child is in school as long as the student is enrolled on at least a half-time basis. Parents can also request a six-month grace period after the student graduates.

Because Parent PLUS loans are unsubsidized loans, interest begins to accrue as soon as funds are disbursed and continues to accrue even while payments are in deferment.

How to apply for a Parent PLUS loan

Parents must submit the Free Application for Federal Student Aid (FAFSA) before they can apply for a Parent PLUS loan. Then, parents can submit a PLUS loan application at StudentAid.gov. If their application is approved, borrowers must sign a promissory note that forms a legally binding agreement for them to repay the loan.

How to refinance a Parent PLUS loan

Borrowers who have a Parent PLUS loan can refinance to get a lower interest rate and a more affordable monthly loan payment, or to transfer the loan to their child after their son or daughter graduates. To qualify for refinancing, borrowers must have strong credit scores (typically 650 or higher).

The savings can be substantial. For example, let’s say a borrower has a $40,000 Parent PLUS Loan at a 6 percent interest rate, and the person can refinance to a loan with a 3 percent interest rate. By doing so, the borrower would be lowering their monthly loan payments by about $58 and saving $6,941 in interest over a 10-year repayment period.

The drawback of refinancing Parent PLUS loans? Because the U.S. Department of Education does not offer refinancing, borrowers must refinance Parent PLUS loans through a private lender—and, unlike federal loans, private student loans cannot qualify for loan forgiveness or income-based payment, which is something to take into consideration.

Parent PLUS loan borrowers looking to refinance should shop around to find the best terms for their new loan.