The Federal PLUS Loan is an unsubsidized federal education loan for graduate students and for parents of dependent undergraduate students. The Federal PLUS Loan, also known as a Federal Direct PLUS Loan, is available after a student exhausts eligibility for Federal Stafford Loans.
Two versions of the Federal PLUS Loan
There are two versions of the Federal PLUS Loan: the Federal Parent PLUS Loan and the Federal Grad PLUS Loan.
Other than the differences in the borrower, the purpose of the loan and some discharge provisions, the Parent PLUS and Grad PLUS loans are nearly identical. The Federal Grad PLUS Loan first became available on endment to the Federal Parent PLUS Loan.
An Unsubsidized Loan
If the interest is not paid as it accrues, it will be added to the loan balance (capitalized) when the loan enters repayment . This increases the amount of debt. After interest is capitalized, interest will be charged on the interest, causing the loan to grow faster.
Interest Rates on Federal PLUS Loans
The interest rates on Federal PLUS Loans are fixed rates that change only for new loans each July 1. The new interest rate is based on the last 10-year Treasury Note Auction in May.
The interest rate on the Federal PLUS Loan is the same for both Federal Parent PLUS Loans and Federal Grad PLUS Loans.
Keep in mind, however, that you are not required to pay interest or make payments on any Federal Direct Loan during the current COVID-19 relief period . The relief period is in effect through at least .
Loan Fees on Federal PLUS Loans
Federal Direct loan borrowers pay an origination fee . The origination fee on the Federal PLUS loan is about 4.2%, four times the fee on Federal Stafford loans.
Loan fees are based on the rate in effect on the date the loan is disbursed. A loan fee is typically deducted proportionately from each loan disbursement , borrowers can also choose to have the fee added to their loan balance.
Loan limits on Federal PLUS Loans
The Federal PLUS Loan has an annual limit equal to the college’s cost of attendance, minus other aid received. The Federal PLUS Loan does not have an aggregate loan limit. The student’s college will determine how much the parents can borrow through the Federal Parent PLUS loan or a graduate student can borrow through the Federal Grad PLUS loan.
If the parent of a dependent undergraduate student is denied a Federal PLUS Loan, the student becomes eligible for higher unsubsidized Federal Stafford Loan limits, the same limits as are available to independent undergraduate students.
Since the Federal Parent PLUS Loan allows a parent to borrow almost unlimited amounts of money for their children, they need to be careful to avoid over-borrowing. Parents should borrow no more for all their children than their annual income. If total Federal Parent PLUS Loan debt is less than the parent’s annual income, the parents should be able to repay the loans in 10 years or less. If retirement is less than 10 years away, they should borrow proportionately less money. For example, if retirement is in just 5 years, the parents should borrow half as much.
Eligibility for Federal PLUS Loans
Borrowers who apply for a federal direct PLUS loan will be subject to a credit check , and they must not have an adverse credit history .
Otherwise, PLUS loan borrowers are not required to have good credit , such as a high credit score, minimum income threshold or low debt-to-income ratio.
The credit criteria for a PLUS loan are backward-looking, considering whether the borrower has had financial difficulty in the past. The PLUS loan does not consider the borrower ‘s future ability to repay the debt.