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How PLUS Loans For College May Help To Close The Gap In College Funding

With the climbing cost of education over the past few years students relying on traditional Stafford loans have often discovered that they are no longer covering most of their expenses. The PLUS program (Parent Loans for Undergraduate Students) was thus introduced and is intended to close the gap between the sum provided by college loans and the actual cost of education.

Although the interest rate is greater than other types of loan the ceiling on borrowing is a great deal more flexible and PLUS loans are not need-based.

For the FFEL program (Federal Family Education Loan) in which loans are funded by private lenders the interest rate is currently 8.5% and loans funded by the US Department of Education under the Direct loan program are currently charged at 7.9%. The difference of just 0.6% might seem inconsequential but can prove to be very substantial over the lifetime of an average loan.

Under the PLUS loans program parents are permitted to borrow up to the total cost of a child's education less any other financial aid amount that the child is awarded. Though PLUS loans are not exactly cheap they can often make a difference when choosing which college to attend or whether to attend at all.

However, since PLUS loans are not need-based, they do need a credit check for approval. Usually it is of course the parent's and not the student's credit which is considered since the parent is signing the promissory note and is responsible for repayment of the loan.

Where the parent's credit history disqualifies him or her from a PLUS loan a co-signer can participate in the loan and a relative or other party can guarantee repayment and take on the legal responsibility as a co-borrower. With the recent difficulties in the sub-prime borrowing area however such cases are less rare than they used to be. This means that in borderline cases the need for a co-signer is becoming increasingly likely.

Apart from changes in interest rates another recent change to the program is its extension to allow professional and graduate students to obtain PLUS loans. The same interest rates and eligibility criteria apply and they have to be studying at a suitable institution and on an eligible program.

Different from many college loan programs, repayment of PLUS loans begins right away and the initial payment is generally required within 30 to 60 days after the loan funds are disbursed. Interest begins to build up from the moment the first payment is drawn down and both principal and interest are paid in regular monthly installments while the student is in college. Payments must be made to the specific lender for FFEL loans and to a US Department of Education servicing center in the case of Direct loans.

It is important to work out all the costs associated with obtaining a PLUS loan very carefully and view it as a loan of last resort. Even something like a home equity loan could well be less expensive because the interest payments are tax-deductible.