The Ultimate Guide to PLUS Loans for College

© Copyright 2010 CorbisCorporationParent loans for undergraduate students (PLUS) are federal education loans made by the U.S. Department of Education to parents of undergraduates, though in some instances they can be made directly to graduate and professional students. Millions of students have used them to cover tuition and related expenses when all other loan, scholarship, and grant funds have been exhausted.

However, the availability of PLUS loans is shrinking, and the number of students denied these loans has dramatically increased due to changes in the USDOE’s underwriting policy made in 2011. This is because PLUS loans require a credit check, which means that parents must allow the federal government to access their credit record and determine whether or not they are a  good risk for a loan. But now, the eligibility regulations have tightened. As reported by Inside Higher Ed,

“Before October 2011, borrowers would be approved if they didn’t have any accounts that were more than 90 days delinquent, or any foreclosures, bankruptcies, tax liens, wage garnishments or defaults within the past five years. During the 2010-11 academic year, 72 percent of PLUS loan applicants were approved…Then the department, attempting to limit defaults on the loans, changed the rules so that unpaid accounts in collections, or charged off but unpaid balances, from the past five years would also count against a prospective borrower. Denials spiked.”

This means that students whose parents have suffered any financial difficulties in the past five years may very well be denied a PLUS loan, and may be unable to rely on these loans to help pay for college. In combination with Congress’s recent decision to tie student loan interest rates to market rates, which can fluctuate and increase to dramatic heights, it is increasingly difficult to afford college tuition and related expenses.

This guide explains the different kinds of student loans available and where to get more information about them, and what you can do if you’ve been denied a PLUS loan.

How to Pick the Right Federal Student Loan

Before you decide to apply for a PLUS loan, make sure you fully understand all of the different loan options that are available to you. Student loans help millions of students go to college, but recent reports indicate that students really don’t pay attention to what they sign or understand the pay-off plans and penalties and consequences of defaulting. So before you decide to go for a PLUS loan, it’s a good idea to understand all your loan options.

  • Stafford Loans are federal loans that undergraduates and graduate students can use to pay for their education. There are two kinds of Stafford loans: subsidized, which are based on financial need and for which the interest does not accrue while loans are in deferment after leaving college, and unsubsidized, which is not based on financial need and for which the interest capitalizes even if the loan payments are deferred. Generally, it’s not a good idea to contract for an unsubsidized loan unless you absolutely have to, because the total repayment amount can be much greater.
  • Perkins Loans are subsidized federal loans for graduate and undergraduate students based on financial need and have a fixed interest rate of 5% over the course of the prescribed 10-year repayment period. One of the interesting features of the Perkins program is that the loans can be cancelled if you become a teacher in a low income or shortage area, or volunteer in the Peace Corps.
  • Parent PLUS Loans are also federal loans offered by the U.S. Department of Education to parents of students who are enrolled at least half-time in an undergraduate, graduate, or professional degree program. Parent(s) must either be U.S. citizens or eligible resident non-citizens, and are required to pass a credit check.
  • Private Loans are offered by banks, credit unions, and other lending institutions, similar to home mortgages and car loans. Unlike federal loans, they generally do not have deferment or forbearance options, so you may need to begin paying them off even before you graduate. However, many private loans do not have the same total amount limits as federal loans, so you may be able to borrow more money with a private loan.

How to Apply for a PLUS Loan

A PLUS loan can help you finance your education when you have no other options. But for those students who don’t have a great relationship with their parents, one of the sticking points of PLUS loans is that you have to work closely with your parents on the application. I’ve heard plenty of stories from students who cannot seem to corral their parents and their parents’ financial information (such as tax returns), to fill out the Federal Application for Federal Student Aid (FAFSA) or apply for PLUS Loans. I’ve also heard many sad stories about students struggling to get divorced parents to cooperate during the application process. The saddest stories of all are from students whose parents refuse to help them for personal and often painful reasons, including the “you think you’re better than me, college boy?” syndrome that strikes some parents when their child decides to take a path different from their own. While this is reflective of dysfunctional families in general, it’s problematic when it hurts a young person who is working hard to pursue a dream.

Regardless of the situation, these are the steps you need to complete a PLUS loan application:

  1. Talk to your parent(s) and explain your educational goals, then ask them if they will contribute via a PLUS loan. Don’t assume that they will automatically agree. Chances are, you’re 18 or older and a legal adult; you are not necessarily entitled to their financial assistance. If they refuse, it may be because they have pressing financial concerns of their own that you know nothing about. Remain objective and don’t play the “you would if you loved me” card. That’s emotional blackmail, and it’s wrong.
  2. If your parents agree to apply for a PLUS loan, schedule a time to work together on the FAFSA application and the “Request a PLUS Loan” option. This will make the process go much more smoothly and reassure your parents that you take this seriously and are willing to do your part.
  3. Gather all required documentation for the PLUS loan application. This includes your parent(s) social security number and their driver’s license, and references from two people living at two separate addresses, including their telephone numbers.

If you are dealing with divorced parents, you need to make sure that you work with the parent with the cleanest credit report, because only one parent has to sign the Master Promissory Note with the Department of Education, and it has to be the same parent that fills out the “Request a Plus Loan” application.

Once the application is completed, the USDOE will conduct a credit check and decide whether to approve the loan. As I explained above, approval is not guaranteed and restrictions have increased. This means that denials have increased. If you and your parent(s) are denied a PLUS loan, there are a few steps you can take to get your application reconsidered.

How to Appeal a PLUS Loan Denial

If your PLUS loan application was denied, you’re in luck, because the USDOE has recently made the appeals process much easier, in response to concerns that the denials have disproportionately affected students at historically black colleges and universities (HBCUs), which saw a 50% increase in the number of denials. The Chronicle of Higher Education reports that, “the department said it would provide colleges with weekly updates of applicants who were eligible for an appeal and would notify applicants, via e-mail, when they qualified for one.

There are two basic steps to a denial appeal:

  • Upon denial notification from the USDOE Contact Direct Lending Plus Credit Appeals at 1-800-557-7394.
  • Find an endorser, someone who does not have a bad credit history, who will sign for the loan. This is someone who will agree to pay the loan if you are unable to.

If you cannot find an endorser, you will not be able to secure a PLUS loan. However, this does not mean that your education financing has hit a wall. If you are denied a PLUS loan, you can submit a Parent PLUS Loan Denial Funds Request, which will allow you to borrow additional unsubsidized Stafford loans beyond the normal limit.

During all of these steps, you will have to work closely with your school’s financial aid office. Though it can be a frustrating process, if you are patient and polite you will more likely be able to work things out. Also, don’t forget that if you cannot afford your dream school immediately, you can always pursue your studies at a less expensive college or university and transfer when your-or your parents’-financial situation improves. Loans are only one higher education financing option. Pursue scholarships, grants, and other financial resources throughout your college experience to help reduce the total amount of money you borrow.

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Source: Inside Online Learning Blog