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Federal Direct PLUS Loan – Review and Options

Ben LuthiPublished on

federal direct plus loan

If you’re thinking about grad school or are a parent hoping to help your undergraduate child, a federal Direct PLUS Loan is designed to help. Depending on your credit situation and other options, however, you may be able to save money elsewhere.

As you consider how to finance your or your child’s college education, here’s what a federal PLUS Loan can do for you and how to tell whether it’s a good fit.

What to know about federal Direct PLUS Loans

Federal PLUS Loans are broken down into two different groups: Grad PLUS Loans and Parent PLUS Loans. The former option is designed for college students pursuing a graduate or professional degree or certificate, while the latter is for parents looking to help an undergraduate student pay for school.

Getting the loan

While the program is the same, some of the eligibility requirements are a little different for each loan type. For all PLUS Loans, you cannot have an adverse credit history, including no recent bankruptcies or foreclosures, unpaid collection accounts and 90-day delinquent accounts, among other things.

If you’re getting a Grad PLUS Loan, you’ll also need to be a graduate or professional student enrolled at least half-time in a program leading to a degree or certificate at an eligible school, and you need to meet all general eligibility requirements for federal financial aid.

With Parent PLUS Loans, on the other hand, you must be the biological or adoptive parent of a dependent undergraduate student who’s enrolled at least half-time at an eligible school. Additionally, both you and your child must meet the general requirements for federal financial aid eligibility. Grandparents and legal guardians are not eligible for Parent PLUS Loans unless they’ve legally adopted the student.

If you don’t meet the Department of Education’s credit requirements, you may be able to apply with a co-signer.

Before you can apply for a federal PLUS Loan, you’ll need to fill out the Free Application for Federal Student Aid (FAFSA) form. Once you’ve completed and submitted that, you can submit a loan application at StudentLoans.gov.

If your application is approved, you can borrow up to the cost of attendance determined by your or your child’s school, minus any other financial aid you or the student receives.

The cost

All federal Direct PLUS Loans charge interest and loan fees, which can change each school year. For loans disbursed on or after July 1, 2019, and before July 1, 2020, the interest rate is fixed at 7.08%.

As for loan fees, which are deducted from each disbursement, you’ll pay 4.248% of each loan amount if your first loan is disbursed on or after October 1, 2018, and before October 1, 2019. If your first disbursement comes during the following year, the loan fee is 4.236%.

Federal loan benefits

Federal Direct PLUS Loans aren’t always the best option. But one reason to consider them is the benefits the U.S. Department of Education provides for its borrowers. These include:

  • Income-driven repayment plans: The Department of Education offers four repayment plans that can lower your monthly payment based on your income level and family size. With Parent PLUS Loans, however, you only have the option to choose the Income-Contingent Repayment Plan after you consolidate your loans through the Direct Loan Consolidation program.
  • Forbearance and deferment: If you’re having a hard time making payments due to financial hardship, either permanent or temporary, you may be able to pause your monthly payments for a time. While some private student loan companies also offer these benefits, they may not be as generous as the government’s options.
  • Student loan forgiveness programs: Depending on which career you pursue, you may qualify for the Public Service Loan Forgiveness (PSLF) or Teacher Loan Forgiveness programs. Note, however, that Parent PLUS Loans only qualify for PSLF and only after consolidating them with a Direct Consolidation Loan.

Depending on your situation and repayment plans, having these perks can be worth it, even if you’re paying more in interest and fees.

Alternatives to federal Direct PLUS Loans

Before you apply for any type of student loan, it’s important to know what else is out there and how it compares. Whether you’re paying for your own education or for your child, here are some alternatives to consider.

Federal Direct Unsubsidized Loans

The Direct Unsubsidized Loan program is available to graduate and professional students but not to parents. Federal Direct Unsubsidized Loans are also provided by the Department of Education, but with some key differences. For example, instead of allowing you to borrow up to the cost of attendance for your school, the maximum you can borrow is $20,500 per year and $138,500 in total.

If that’s all you need, though, you’ll benefit from a slightly lower interest rate of 6.08% through June 30, 2020. Also, the loan fee is much lower at 1.062% through September 30, 2019, and 1.059% through the following year.

Finally, Direct Unsubsidized Loans don’t require a credit check of any kind, so you can qualify even if you have some major negative items on your credit report.

Federal Direct Subsidized or Unsubsidized Loans

If you’re a parent, you may benefit from having your undergraduate child apply for federal Direct Loans. Depending on their financial need, they may qualify for subsidized or unsubsidized loans. With subsidized loans, the Department of Education covers the cost of interest until your child starts making payments after they’re out of school, potentially saving them a lot of money.

Even if they don’t qualify for subsidized loans, the cost of an undergraduate Direct Loan is much lower than a Parent PLUS Loan. The interest rate is just 4.53% through June 30, 2020, and the loan fees are the same as for graduate unsubsidized loans.

While your student will need to apply for these without you, it’s possible to set up an arrangement where you make payments on their behalf, allowing you to still help them out.

Private student loans

If you have an established credit history, you may be able to save money by working with a private lender instead of with the federal government. Some private student lenders offer rates starting much lower than what you’ll pay on a federal Direct PLUS Loan.

Also, most private lenders don’t charge origination fees, providing you with instant savings. While you’ll typically need strong credit and financial profiles to score the lowest rates, you can also get a co-signer to help you.

That said, private student lenders don’t provide borrowers with the same benefits as the federal government. While you may get access to deferment and forbearance, you won’t find a lender that offers an income-driven repayment plan or loan forgiveness programs.

Finally, you may be limited in how much you can borrow each year and in total. Make sure to check the fine print to see if you can get enough.

How to pick the best loan option for you

If you’re looking to finance your own graduate education or your child’s undergraduate schooling, take some time to compare the different options available before you apply. Here’s a quick summary of the benefits and drawbacks of each of the loans we’ve explored.

Federal Direct PLUS Loans

If your credit is less than perfect, but you don’t have any major negative items on your credit report, and you don’t want to be limited in how much you can borrow, Grad PLUS and Parent PLUS Loans can be appealing.

Pros

  • You can get approved as long as you don’t have an adverse credit history
  • You can borrow as much as you need based on the cost of attendance and other financial aid
  • You’ll gain access to certain federal benefits as a parent, and all benefits as a student

Cons

  • You’ll have a hard time getting approved if you’ve made some major credit mistakes
  • Interest rates are the highest among federal student loans
  • You’ll pay a high upfront loan fee on each disbursement

Direct Unsubsidized Loans

If you have an adverse credit history and either can’t get a co-signer or don’t want to involve someone else in paying for your education, Direct Unsubsidized Loans may be worth considering.

Pros

  • There’s no credit check required
  • You’ll pay a lower interest rate and loan fee
  • You’ll gain access to all federal benefits

Cons

  • You may not be able to borrow enough
  • You’ll pay a loan fee

Federal Direct Subsidized or Unsubsidized Loans

If you’re trying to help your undergraduate child, having them apply for a loan may end up saving you more money upfront and in the long run.

Pros

  • There’s no credit check required
  • Interest rates and loan fees are the lowest among federal student loans — your child may also qualify to have some or all of their interest subsidized during school.
  • If desired, you don’t need to worry about shifting the debt to your student after they graduate

Cons

  • Parents can’t apply for these loans directly

Private student loans

If your credit history is strong or you have a creditworthy co-signer, private loans can potentially save you money. They may not be worth it, however, if gaining access to federal loan benefits is a priority.

Pros

  • You may qualify for lower interest rates than what the government has to offer
  • There are usually no upfront fees
  • You’ll have your pick of multiple lenders

Cons

  • They don’t offer most federal benefits, and may not offer the same level of value with others
  • Your loan terms will be based on your or your co-signer’s creditworthiness
  • You won’t get nearly as much flexibility with repayment

The bottom line

If you’re looking at Federal Direct PLUS Loans, chances are that they’re not your only option. As you consider federal PLUS Loans and their alternatives, it’s important to consider what’s most important to you and which loan would be the best fit. 

And if you’re leaning toward private student loans, you can easily compare interest rates and find the best a lender with Purefy’s rate comparison tool. As you thoroughly compare each option, it’ll be easier to determine which one is the right one for you.