As home values, invested nest eggs, and regular bank loans have shrunk, more parents are turning to the federal PLUS program to help pay their children’s college tuition. Luckily most—though not all—of the recent changes to the program should make loans at least a little cheaper and easier for many parents this fall.
Application changes: The federal government doesn't require parents who want a PLUS loan to fill out a Free Application for Federal Student Aid. But many colleges insist on a FAFSA to see if the student qualifies for aid that might reduce parents' need to borrow. Starting July 1, parents no longer need—or have the opportunity—to shop for a bank to make a federally backed loan. Parents who want a PLUS loan must apply through their student's college, which will arrange for loans directly with the federal government. Parents are still free to apply for private loans through banks, credit unions, nonprofits and new peer-to-peer lending services. Many of those private lenders were offering initial variable rates of about 3 percent to good credit customers in June 2010. But the federal loans offer some advantages such as a single fixed rate, the ability to defer payments while the student is in school, and free insurance that clears the debt if the student or parent dies.
[Read an FAQ about PLUS loans.]
Approval rule changes: Unlike federal student loans, which are awarded to students regardless of their credit scores, the federal government denies PLUS loans to parents with bad credit. Recent changes to the approval rules are a mixed bag for parents who've had trouble paying bills. As the housing market started to crash, Congress passed a temporary exemption, approving PLUS loans for parents who'd had trouble with their mortgages. But that exemption ended Dec. 31, 2009. The good news, however, is that the federal government is generally much more lenient about credit problems than private banks. Research shows that the private banks rejected 42 percent of PLUS applicants. But starting July 1, the federal government will cut out the banks and make all PLUS loans directly. The government, historically, has only denied about 21 percent of PLUS applications.
Lower interest rate: Private lenders making federally backed PLUS loans traditionally charged 8.5 percent in annual interest, and 4 percent of the value of the loan in up-front fees, which added up to a true annual percentage rate of 9.4 percent. But as of July 1, the federal government will make all parent PLUS loans, and will charge only 7.9 percent in annual interest, plus the same 4 percent in fees, which adds up to an 8.8 percent APR.
Searching for a college? Get our complete rankings of America's Best Colleges.