Risk and Dangers of PLUS Loans

PLUS loans are offered directly through the U.S. Department of Education or private lenders, for the Federal Family Education PLUS Loans (FFEL). PLUS loans provide a way for parent or student borrowers to obtain funds necessary to meet the cost of higher education. The program allows a parent or student with good credit to borrow their unmet financial needs for college.

PLUS loans are a part of the federal student financial aid program. These loans are not needs based, which means that anyone that meets the qualifications of the lender can obtain a PLUS loan. Additionally, these loans do not have loan limits and carry high risk.  

Qualifying for a PLUS Loan

Because PLUS loans are not needs based, a borrower must meet the financial and credit qualifications of the private lender. Promissory notes are required on all loans. This promise to pay represents a danger to the borrower if they were to default on the loan. It also means that borrower's should be careful not to borrow more than what they can afford to pay back in the event that they experience financial or economic difficulty.

Interest Rates

The interest rates charged on PLUS loans vary from year to year. The interest rates for a Direct PLUS Loans are lower than those on a FFEL PLUS because the federal government is the lender of record.

Private lenders provide the FFEL and thus accept the risk of default. A borrower that seeks a FFEL PLUS may need to meet additional requirements to ameliorate the risk of default that the lender faces.

Repayment Terms

PLUS Loans, unlike other types of federal student financial aid programs such as Stafford and Perkins loans must be paid back within 60 days of the disbursement of the funds to the school. The interest and principal payments must be made unless a deferment is granted. Deferred loans allow the borrower to delay repayment until after graduation.

Even during the deferral period, the interest accrues on the loan, leaving the borrower with a potentially high debt obligation to pay-off once the deferral period has expired.

Bad Credit Report

Failing to repay a PLUS loan can result in a bad credit report. This will affect the borrower's ability to take out other types of loans in the future, such as auto and homeowner loans. This negative report may also affect a borrower's future employment prospects.

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