A third federal college-loan program is the Parent Loan for Undergraduate Students (PLUS) loan program. Unlike Stafford and Perkins loans, PLUS loans are made to the parents of the college student.
The borrowing limit for a PLUS loan is not a fixed dollar amount. Rather, it is equal to the student's total cost of college, less any other sources of financial aid. For example, if it costs your child $12,000 a year to attend a state college for all expenses, and he or she receives a grant of $2,000, you can borrow up to $10,000 a year.
In order for parents to be eligible for a PLUS loan, their child must be an undergraduate student and attending college on at least a half-time basis. If you are uncertain about the half-time status, you should check with the records office of your child's college. In order for parents to be eligible for a PLUS loan, their child must be dependent on their financial assistance.
Since parents are the borrowers of a PLUS loan, the lender will check their credit report as part of the loan-approval process. In the event of bad credit, the parents may still be able to obtain a PLUS loan if they receive a personal guaranty to repay the loan. Also, parents must not be in default on any federal student financial-aid program.
The interest rate on PLUS loans is set every July 1 for the subsequent year. The current interest rate of 6.1% is calculated by adding a margin of 3.1% to the 3-month T-bill yield. The lifetime cap on a PLUS loan is 9%. The loan repayment period for a PLUS loan begins two months after the loan is disbursed.
PLUS loans can be administered through either the Federal Family Education Loan Program (FFELP) or Federal Direct Student Loan Program (FDSLP). A private lender disburses FFELP loan funds to your school, while the government disburses FDSLP funds to the school directly. Fees on a PLUS loan are as high as 4 percent of the loan amount.
In addition to Stafford, Perkins and PLUS loans, there are a variety of federally guaranteed loan programs for specialized education. These loan programs include Sallie Mae loans for graduate business, law, medicine and vocational programs. Sallie Mae, a government sponsored enterprise, also offers loans to parents to help pay for costs of primary and secondary education.
Sometimes, borrowing from the loan programs described above doesn't cover all the costs of college. Some parents turn to home equity loans to raise money for their child's college expenses. Or they may have set aside funds in a college savings plan or education IRA. If you don't have such resources, you may wish to consult a private lender.