THE FEDERAL PLUS LOAN PROGRAM AT A GLANCE

Overview

As college cost continue to rise, parents may find that their resources and the financial aid award falls short of covering the full cost of their son or daughter’s college education.

One of the most affordable options to covering this gap is the Federal PLUS loan. Unlike federal student loans, PLUS loans carry no set dollar limits. Credit worthy parents/stepparents of dependent undergraduate students attending an eligible college or university may take PLUS loan funds for the entire cost of attendance less any other financial aid. PLUS loans are not based on the family’s income or assets and are for undergraduate study only.

PLUS loans are the financial responsibility of the parents, not the student. Parent, for purposes of PLUS loan eligibility, are a student's natural or adoptive mother, father, court-appointed legal guardian, or the spouse of a parent who remarried if the spouse's income and assets would have been taken into account when calculating a dependent student's expected family contribution.

PLUS loans also allow parents to not have to liquidate investments and savings in order to pay the college bill. When investments achieve high returns, parents may not want to cash them in. As always, families should consult with their professional financial advisors before making important financial decisions.

FFELP or Direct

Like the Stafford Loan, PLUS loans are either FFELP (provided by private lenders, such as banks) or Direct (funds provided by the government). Most of the benefits to parent borrowers are identical in the two programs.

Eligibility

PLUS loans are made to parents of full or half-time dependent undergraduate students. A parent must be a U.S. citizen, national, permanent resident, or eligible non-citizen with a mailing address in the U.S. in order to apply for a PLUS Loan. This loan can be used to pay the Expected Family Contribution (EFC) and when combined with a Tuition Installment Payment Plan serve as an effective money management tool, which also greatly increase the “Education Purchasing Power” of families.

Interest Rate

The PLUS Loan, although not a subsidized loan, is a program with a variable interest rate that is capped at 9%, which makes PLUS rates attractive compared with rates on many private education loans. The PLUS loan variable interest rates is based on 52 week T-bill rate + 3.10%. The interest rate is adjusted each year on July 1. Parents are notified of interest rate changes throughout the life of the loan.

Effective July 1, 2002 the PLUS loan interest will be 4.86%.

Congress changed the interest rate calculation for PLUS loans made on or after October 1, 1998. Parents with PLUS loans that were first disbursed before October 1, 1998, the interest rate on these loans may be different.

Repayment Begins

PLUS loan repayment begins 60 days after the funds are fully disbursed, and the repayment term is up to 10 years. Interest is charged on the loan from the date that the first disbursement is made until the loan is paid in full. Origination and insurance fees of up to 4% may be deducted. Some lenders offer a slight discount for automatic payment plans.

Obtaining A PLUS Loan

· Although the PLUS Loan application process does not require completion of the FAFSA, the completed and submitted FAFSA begins the process for receiving optimum student financial aid. Students should complete and submit the FAFSA or the renewal FAFSA. The FAFSA is a federal application that is used to determine financial aid eligibility for most forms of financial aid.

· The FAFSA application is available from school Financial Aid Offices, high school guidance offices, public libraries, the Federal Student Aid Information Center at 1-800-4-FED-AID (1-800-433-3243), and online at www.fafsa.ed.gov. For more information about the FASFA go to the Getting Started section, Understanding and Completing the FASFA.

· Parents should receive their child’s Student Aid Report (SAR) four to six weeks after the FASFA has been completed and submitted. The Student Aid Report (SAR) is mailed to the student. The SAR is generated from the information provided on the FAFSA. Based on this report, schools will create financial aid award packages that will be sent to the student. For more details regarding the SAR please see, Understanding and Completing the FASFA, under the Getting Started section.

· Students must meet the general eligibility requirements for federal student financial aid.

· Parents must also meet some general eligibility requirements such as; the parents must meet citizenship requirements.

Credit Based Loan

PLUS Loans are credit based loan applications. Lenders perform standard credit checks using national credit bureaus before approving the loan. Unlike credit checks for other types of borrowing, the PLUS credit check merely determines if the borrower has an “adverse credit history.” Therefore, if the credit report indicates any outstanding tax liens, unpaid judgments, over 90 days past due on any scheduled payment, delinquent or defaulted loans or defaulted credit card debt or any bankruptcy, default, repossession, unresolved litigation, or judgment within the most recent five years, the PLUS loan will not be approved.

Credit Check

PLUS borrowers must pass a credit check, but many lenders offer PLUS pre-qualification services, to determine in advance if parents can qualify. Some education loan providers offer online loan applications and “loan by phone.” If parents can not pass the credit check, parents might still be able to receive a loan if someone, such as a relative or friend who is able to pass the credit check, agrees to endorse the loan, promising to repay it if the parents should fail to do so. Parents might also qualify for a loan even if they do not pass the credit check if they can demonstrate that extenuating circumstances exist.

Second Look

Most lenders have a “Second Look” process. If the loan is denied because of an adverse credit rating, the lenders will contact you and explain the appeal process.

PLUS Loan Limits.

The yearly limit on a PLUS Loan is equal to the cost of attendance minus any other financial aid received. For example, if the cost of attendance is $6,000 and the student receives $4,000 in other financial aid, parents could borrow up to but no more than$2,000.

Loan Applications

PLUS Loan applications are available through college financial aid offices, private lenders, guarantors and online from the Education Resource Center. Go to Loans and click on PLUS Loans.

Incorrect or incomplete information may, and in most cases will, cause applications to be delayed.

Disbursement

In most cases, the PLUS loan will be disbursed in at least two installments, and no installment will be greater than half the loan amount. The funds will first be used to pay for tuition, fees, room and board, and other school charges such as supplies, and equipment including personal computers in many cases as well as transportation and commuting expenses. If any loan money remains, the parents will receive the amount as a check or in cash, unless they authorize the funds to be released to the student or to be put in the student’s school account. Any remaining loan money must be used for the student’s education expenses.

Cancellation

The school must notify parents in writing whenever it credits the student’s account with the PLUS Loan funds. This notification must be sent to the parents no earlier than 30 days before, and no later than 30 days after the school credits the student’s account. Parents may cancel all or a portion of their loan if they inform the school that they wish to do so within 14 days after the date that the school sends this notice, or by the first day of the payment period, whichever is later. If the parent receives PLUS Loan funds directly by check, they may refuse the funds by not endorsing the check.

PLUS Loan Fee

Parents pay a fee of up to 4% of the loan. This fee is deducted proportionately each time a loan disbursement is made. For a FFEL PLUS Loan, a portion of this fee goes to the federal government and a portion goes to the guaranty agency to help reduce the cost of the loans. For a Direct PLUS Loan, all of this fee goes to the government to help reduce the cost of the loans. If a parent does not make their loan payments when scheduled, they may be charged collection costs and late fees.

PLUS Loan Repayment

Generally, repayment must begin within 60 days after the final loan disbursement for the period of enrollment for which the parent borrowed. There is no grace period for PLUS loans. Interest begins to accumulate at the time the first disbursement is made. Parents must begin repaying both principal and interest while their student is in school.