What Is a Direct PLUS Loan, and How Does It Work?

• Direct PLUS loans, or undergraduate parenting loans, are fixed-rate loans with a term of up to 30 years.
• Contrary to what the name suggests, both parents and graduates can get Direct PLUS loans.
• The interest rate on Direct PLUS loans for the 2021-22 school year is 6.28%.
• Read more about Insider’s personal financial reporting.

What is a Direct PLUS Loan?

Direct PLUS Loan stands for Parent Loan for Undergraduate Students. Don’t let the name confuse you, however, as just like parents, graduates and professionals can get a loan. You can get a Direkt PLUS loan to cover expenses that are not covered by other financial aid from your school or your child’s school.

The U.S. Department of Education is your lender, and you cannot have a bad credit history to obtain a Direct PLUS loan. The maximum loan amount that you can receive results from the participation costs minus any other financial aid that you or your child receive.

You pay a fixed rate of interest over the life of the loan with a term of up to 30 years. You pay either monthly or quarterly, and the first payment is often due 60 days after the last payment was made.

The rate for the school year 2021-22 is 6.28%. The loan is not subsidized, so interest will be charged while you or your child are at school. Due to the coronavirus pandemic, interest payments for federal student loans are currently up to 30.

You also pay a placement fee of around 4.2%, which is deducted from the loan payout. There are no early repayment penalties with a Direct PLUS loan, so you can pay it off early without any fees.

Who can get a Direct PLUS loan?

Unfortunately, as a student, you cannot get a Direct PLUS loan – your parents will have to take it out for you. If you are a graduate or a professional student, you can get Direct PLUS credit.

A direct PLUS loan is commonly referred to as a parent PLUS loan when given to a parent and a graduate PLUS loan when given to a graduate or professional student.

How to apply for a Direct PLUS loan

Schools generally require you to apply for a Direct PLUS loan online, although some schools have different application processes. You will need the following information to apply:

• Approved student aid card
• School name
• Name, social security number, date of birth, address and phone number of the student
• Parents address, phone number and email address (if you are a parent)
• Name, address and telephone number of the employer

Filling out the application takes about 20 minutes and must be done in a single session.

Advantages and disadvantages of a Direkt PLUS loan

advantages

• May offer better terms than a private student loan. If you still need money after attractive forms of funding such as scholarships and studies have expired, you can get cheaper interest rates and a longer term with a Direkt PLUS loan. Private student loan offers vary based on creditworthiness and other financial factors, but federal interest rates are capped at a certain threshold and have a repayment period of up to 30 years.
• No early repayment penalties. If you repay the loan early, you will not incur any fees. Doing this will save you money in interest.

disadvantage

• You pay a commitment fee with the loan. From the school year 2021/22 you will be charged a placement fee of approx. 4.2%, which will be deducted proportionally from each loan disbursement. This fee is roughly four times that for direct subsidized and unsubsidized loans.
• You are not eligible for most income-oriented repayment plans. While the government offers four different types of federal student loan repayment plans, Direct PLUS loans only qualify for one of them, income-contingent repayment (ICR). You pay a maximum of 20% of your monthly freely disposable income with ICR over a maximum period of 25 years.
• You don’t have an automatic grace period on your loan if you are a parent. While Grad PLUS loans and federal direct subsidized and unsubsidized loans have an automatic six-month grace period before you must begin paying, PLUS parenting loans do not have the same benefits. You can request a six month grace period after your child graduates, leaves school, or enrolls mid-term, although there is no guarantee that they will be approved.

Alternatives to the Direkt PLUS loan

Before opting for a Direkt PLUS loan, you should take a look at what other financial support your school or your child’s school offers, such as: This help is often available for free or at a lower cost than a Direct PLUS loan. So, be sure to take a close look at the financial assistance package before taking this loan.

Private student loans can also be an option for parents as they can help pay for your child’s college without being held responsible for their debts alone. Private student loans often require a parent to be a co-signer and may offer lower interest rates if you have great credit. However, personal loans are often worse options than PLUS loans because they tend to charge high interest rates if your creditworthiness is not very good.

Although Direct PLUS loans can be a great option to bridge the gap between what you can afford and what you need, make sure you understand what you are getting yourself into before you sign up or Your child will sign on the dashed line.

Ryan Wangman is a Review Fellow at Personal Finance Insider reporting on mortgages, refinancing, bank accounts, bank reviews, personal loans, and student loans. In his previous personal finance writing experience, he wrote about creditworthiness, financial literacy, and home ownership.

source https://collegeeducationnewsllc.com/what-is-a-direct-plus-loan-and-how-does-it-work/