Risks of direct plus loans

Learn more about Direct PLUS loans, their functionalities, Risks related to them, things to remember if you have direct PLUS loans

Updated by Aparna A on 12th August 2020

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Deciding the type of loan you apply is equally important, to the subjects you choose to study while aiming for an ambitious career. Being aware of the downside of any loan you apply, can save you from numerous debt in the future. Parent PLUS loans are usually applied by parents to help their kids get through with their education. But, it comes with a few risk factors that are to be considered.

 

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Functionalities of Direct PLUS loans

The full form of PLUS loans is - parent loans for undergraduate students. Parent PLUS is a loan, usually applied by the student's parent to help them cover college fees. In this case, it is the responsibility of the parent to repay the PLUS loans. Unfortunately, there is a drawback to this loan, that is: it does not qualify for income-driven repayment plans. When a student needs more money that is not covered by grants, work-study jobs, etc, parents take these loans to help their kids. But these loans are to be paid only by the parents even after the kid qualifies to have a job, he or she cannot pay these loans on behalf of their parents. Though PLUS loans can help you borrow a huge amount of money for loans, it brings up possibilities of increasing the debts. Due to the pandemic which occurred this year, according to the CARES ACT, we have these loans qualified for administrative forbearance were the loans need not be paid until September 2020. The PLUS loans ideally, must be repaid in 10 years with a fixed rate of interest throughout all these 10 years. If you wish to extend, you can extend the repayment duration to 25 years.


Risks related to Direct PLUS loans

  1. Even during bankruptcy, you will still need to repay direct PLUS loans. So the parents need to be cautious to make timely repayments as it can risk the loan going in default. Bankruptcy does not dismiss Direct PLUS student loan debt. In this case, the government will hold your tax refunds or seize your wages. The government can collect your debt anytime so defaulting is not a wise idea. Contact your loan servicer for help and advice. These loans are not forgiven even after consecutive payments for years.

  2. Unlike the other loans, these loans do not have any grace period. Ideally, most of the loans do have 6 months of the grace period provided before you start your repayment. Unfortunately, does not apply to Parent PLUS loans. The repayment starts immediately after the loans are disbursed. Therefore, if you enquire more time to start your repayment, do contact your loan servicer requesting deferment for few months after the student leaves the school.

  3. Another important information to consider is to know that PLUS loans are not eligible for most income-driven repayment plans. The 4 income-driven repayment plans offered by the government are REPAYE, PAYE, IBR, ICR plan. The benefit of enrolling for an income-driven repayment plan is that the repayment is calculated by discretionary income, residence, and a number of people in the family. And after several payments, these loans are also forgiven. The parent PLUS loans are limited to only ICR repayment plans where repayment is calculated with discretionary income. And these repayments are to be done for 25 years which can be tough on a parent.

  4. Since direct PLUS loans are got easily, by just having a good credit score! can lead to borrowing more money than what is required. Since the history of debt is not verified, it's possible to get a loan with other outstanding debt and increases the chances of loan default.


Things to remember if you have Direct PLUS loans

You can also consider choosing private loans because in some cases, they provide lower interest rates. There are other options like scholarships and grants that can be applied, though scholarships are provided based on grades. As a parent, you can borrow loans from private organizations to help your kid, while they are still at school. In this case, once the student has a job, he/she can make repayments. If you have PLUS loans you can refinance your loans to lower the interest rates for your monthly payments. It is wise to complete your repayments before your retirement.