PLUS Loan: What to Watch Out For

The PLUS loan program helps parents cover the cost of sending a child to college or helps cover the cost of graduate school. Parent PLUS loans are extended to the providers, not to the students themselves, unlike other federal student loan programs. Both types of PLUS loans are available at a low, fixed rate, and the interest may even be tax deductible. However, there are some drawbacks to electing a PLUS loan to help pay the cost of education.

More Restrictive than Other Options

Whenever you opt to use the federal government as a funding source, you will have more restrictions on your loan than going through a private lender. The government has to be very careful to assure loans are dedicated toward the programs specified under their intent and purpose with the government. This means the PLUS loan will only cover the cost of tuition, plus some qualifying supplies. If you need assistance for the cost of housing, dining and other needs, your PLUS loan may not assist you. Further, you will always be required to reapply for a PLUS loan in order to get your loan limits each year. If the cost of tuition increases or decreases, your loan limits will adjust. Using a personal loan or a second mortgage will provide you with more flexibility. 

Immediate Repayment Requirements

Graduate PLUS loans may qualify for a delayed repayment plan. Parent PLUS loans, though, will begin to require payments immediately after a student graduates. The cost of education can be extremely high, particularly at private institutions. This means loans can reach $200,000 in just four years. When this loan is called in, payments can be overbearing for some families. While it is easy to assume you will be in a stronger financial position in the future, this is not always the case. Signing a contract for high payments at a time far in the future can leave you without options if you lose your job, lose money on your investments and savings, or suffer another financial emergency. 

Risks of Loan Default

Defaulting on a loan with the federal government comes with unique consequences. Of course, you will be reported to the credit bureaus and suffer the normal damages to your financial strength. If you consider consolidating to avoid default, you will only be able to consolidate with other federal loans. This restriction can become a problem if you are in debt to multiple sources. You will also be subject to wage garnishment. Because the federal government can tap into your earnings, you may have your income taxes garnished without the opportunity to control how much money is seized each month.

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