Hello. I know some folks have some really negative views of PLUS loans, but for me, they offer a better deal than any other loan I can qualify for. So I am directing this question to parents who have navigated this process, in hopes of gaining a clearer understanding for how it works. PLUS loan haters, please go bother someone else.
When my son starts school next fall, I expect that I will need to borrow about $10,000 each year he is in college. As I am budgeting as much as I can for up front payment of costs, I won’t have a lot of money left to begin full payment on what will become a $40,000 debt while my son is in school. But I know I can swing the monthly payments for the first $10,000. My question is, how do I work financing the successive years? Am I allowed to keep paying full payments on the one loan, and then only pay interest on the next three loans, consolidating those as we go, so that I will only ever have two payments? Or is there another way that parents typically do this?
"When do I begin repaying my loan?
Your Direct PLUS Loan enters repayment once your loan is fully disbursed (paid out).
However, if you are a graduate or professional student, your loan will be placed into deferment while you are enrolled at least half-time and for an additional six months after you cease to be enrolled at least half-time.
If you are a parent borrower, you may contact your loan servicer to request a deferment
while you or your child are enrolled at least half-time and
for an additional six months after your child ceases to be enrolled at least half-time.
If your loan is deferred, interest will accrue on the loan during the deferment. You may choose to pay the accrued interest or allow the interest to capitalize when the deferment period ends. Your loan servicer will notify you when your first payment is due."
If you borrow $10k the first year, your interest will being to accrue when the loan is disbursed (usually half in the fall and half in the spring). Payment will be figure on $5000 in the fall, $10,000 (less whatever you have repaid) in the spring. You can ask to only repay the interest or even to defer that, but if you do that you’ll have quite a bit of interest built up.
You may end up with 4 separate loans, or you may be able to combine the loans each year. You almost always can consolidate the loans at the graduation, so instead of 4 x $10k, you’ll just have one payment on a $40k; if the interest rates are different, they’ll figure out a combined rate.
Thanks twoin and SimpleLife. It looks like I get to choose how I want to handle each loan separate from the others, which is good. My goal would be to pay enough on each so that my final loan consolidation will be something under $40,000. I want to be able to afford to consolidate into a 10-year-loan, which it sounds like I can. Whew! Thank goodness I only have the one son!
We used Plus loans and they can be a good option if you see your income increasing enough to make the payments (& trade offs) worth it. Otherwise, carefully consider how you will make the payments out of future income, if you are not able to cover expenses with current and past income.
Remember to figure in the 3% origination fee and 1% federal default fee when calculating how much you will need.
I don’t think people view PLUS loans as bad, just expensive. There probably isn’t a better unsecured loan option out there, and there are some repayment options. It’s also difficult (as evidenced by your question) to see how payments on a $10k loan the first year are going to be growing and growing each year, and it is doubtful that your income will grow at that same rate.
You may get to year 3 and say you just can’t take on any more debt, and I hope you have that strength if it comes to that. When I went to school, I didn’t qualify for any FA or student loans, yet my parents didn’t give much help. I worked and made the whopping minimum wage of $2.13/hr. So I worked more. I actually really grateful that I couldn’t take loans. It wasn’t fun at the time but in the long run it was better to have no loans. I went to grad school and could get the GSL, and I willingly took it. And then I didn’t watch my pennies so carefully. I still worked, but the pressure to spend wisely wasn’t there. After grad school, I still didn’t make much and those payments were really hard to make.
Just take only the loans you absolutely can’t avoid. My own kids don’t try as hard for scholarships as they should because they know I’ll pay. That bothers me but I don’t know what to do about it (except make a big deal about it when they get one!). They are living frugally and do earn their own spending money and book money, but I’d sure like them to turn over every rock looking for money before borrowing.