November 4, 2021
  • November 4, 2021

What is a Direct PLUS loan and how does it work?

By on June 29, 2021 0
  • Direct PLUS loans, or parent loans for undergraduate students, are fixed rate loans with terms of up to 30 years.
  • Contrary to what the name suggests, parents and graduate students can get Direct PLUS loans.
  • The interest rate on Direct PLUS loans for the 2021-22 school year is 6.28%.
  • Learn more about Insider’s personal finance coverage.

What is a Direct PLUS Loan?

Direct PLUS Loan stands for Parent Loan for Undergraduate Students. However, don’t let the name confuse you, as graduate students and professionals alike can take out a loan as well as parents. You can get a Direct PLUS Loan to pay for expenses not covered by other financial aid offered by your school or your child’s school.

The US Department of Education is your lender, and you can’t have a bad credit to take out a Direct PLUS loan. The maximum loan amount you can receive is determined by tuition fees less any other financial assistance you or your child receives.

You will pay a fixed interest rate over the term of the loan, which can last up to 30 years. You’ll make monthly or quarterly payments, and the first payment is often due 60 days after the last payment is made.

The rate for the 2021-22 school year is fixed at 6.28%. The loan is not subsidized, which means interest will accrue while you or your child is in school. Interest payments on federal student loans are currently on hold until September 30, 2021, due to the coronavirus pandemic.

You will also pay an origination fee of approximately 4.2%, which will be deducted from the loan disbursement. There are no prepayment penalties with a Direct PLUS loan, so you can pay it off sooner at no cost.

Who can get a Direct PLUS Loan?

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

A Direct PLUS loan is commonly referred to as a parent PLUS loan when made to a parent, and as a grad PLUS loan when made to a graduate or professional student.

How to apply for a Direct PLUS loan

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

  • Verified Federal Student Aid Identity Card
  • Name of the school
  • Student’s name, social security number, date of birth, address and telephone number
  • Parent’s address, phone number and email (if you are a parent)
  • Employer’s name, address and telephone number

The application will take approximately 20 minutes to complete and should be completed in one session.

Advantages and disadvantages of a Direct PLUS loan

Alternatives to the Direct PLUS loan

Before considering a Direct PLUS Loan, you should see what other financial aid your or your child’s school offers, such as scholarships, scholarships, work-study, subsidized and unsubsidized direct loans. You will often benefit from this assistance free of charge or at a lower cost than with a Direct PLUS loan, so make sure you are aware of all the financial assistance before contracting this loan.

Private student loans can also be an option for parents, as they allow you to help pay for your child’s college without being solely responsible for their debt. Private student loans often require a parent to co-sign and may offer lower interest rates if you have excellent credit. But private loans are often worse options than PLUS loans because they tend to charge high rates if your credit is less than excellent.

While Direct PLUS loans can be a good option to bridge the gap between what you can afford and what you need, make sure you understand what you are getting into before signing on the dotted line for yourself or your partner. child.

Ryan Wangman is a Research Officer at Personal Finance Insider and reports on mortgages, refinancing, bank accounts, bank notices, personal loans, and student loans. During his past personal finance writing experience, he wrote on credit scores, financial literacy, and homeownership.

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