College costs are rising, with some of the most expensive schools now costing upwards of $60,000 a year, according to Forbes. Most students can’t afford to pay these costs without help. As soon as you decide to seek higher education, you should start exploring what types of grants and scholarships, basically free money that doesn’t have to be paid back, you may be eligible for. The next step is to apply for student loans.
Federal student loans are funded by the U.S. Department of Education under the William D. Ford Direct Loan Program and usually have the most competitive terms and conditions. Direct Loans have low and fixed interest rates as well as flexible repayment plans. When federal loans are still not enough to cover the expense of college, you may wish to explore private loans through independent financial institutions, although this should be a last resort.
The Direct Loan program offers financial aid through several different loan types for undergraduate students, graduate students, and parents of undergraduate students to make higher education more accessible for most students. Federal loans include Direct Unsubsidized, Direct Subsidized, Direct PLUS, and Direct Consolidation Loans. The Direct PLUS Loan is a type of federal financial aid given to either graduate or professional degree students or the parents of dependent undergraduate students.
In order to be eligible for federal financial aid, you must:
- Be a U.S. Citizen or U.S. National or have a green card, have battered immigrant status, have a T-Visa, or have a specified arrival-departure record
- Have a valid Social Security Number (unless you are from the Republic of Palau, Republic of the Marshall Islands, or the Federated States of Micronesia)
- Have a high school diploma, GED, or equivalent
- Be enrolled at least half-time in an eligible degree or certificate program
- Maintain satisfactory academic progress
- Be registered for the U.S. Selective Service if you are a male between the ages of 18 and 25
- Not be in default on other federal loans
- Sign an agreement to use funds for educational purposes
In the case of a Direct PLUS Loan, if you are borrowing on behalf of your child, both you and your child need to meet these eligibility requirements. Graduate or professional degree students need to be enrolled in a degree- or certificate-granting program at least half-time at a participating school. Direct PLUS Loans are based on your credit history and borrowers with adverse credit may not qualify. If you do have adverse credit, you may still be able to obtain a Direct PLUS Loan by satisfactorily documenting the extenuating circumstances that led to your adverse credit history or by obtaining an endorser. An endorser cannot have adverse credit and agrees to be financially liable for you should you not be able to repay the loan. A dependent student cannot be the endorser for a parent seeking a Direct PLUS Loan on their behalf.
A Direct PLUS loan is not offered to undergraduate students directly, but rather to the parents of undergraduate students who are still considered dependents. This means that the student is under 24, unmarried, has no dependents, and is therefore not yet considered financially independent. Direct PLUS loans are also offered to professional degree and graduate students to help pay for educational expenses. There is no set maximum amount for a Direct PLUS Loan, and unlike other student loan options, PLUS Loans are not based on your income. The maximum loan amount you may borrow is determined by taking the total cost of attendance at your school and subtracting any other forms of financial aid you may be receiving to decide how much money you will need to complete your education. Your school will determine the actual amount of your loan, but it cannot exceed the cost of attendance.
Direct PLUS Loans do have an origination fee associated with them that may differ each year, depending on when your loan is disbursed; it is a percentage of your actual loan amount deducted from your actual disbursement. For loans disbursed between October 1, 2015 and September 30, 2016, Direct PLUS Loans have a fee of 4.272 percent added on. Interest rates also change annually; however, once you agree to the terms, the rates are fixed for the life of your loan. The current interest rate for a Direct PLUS Loan disbursed between July 1, 2016 and June 30, 2017 is 6.31 percent. Direct PLUS Loans accrue interest from the time they are disbursed until they are paid off.
Applying for a Direct PLUS Loan
In order to apply for federal financial aid, you must first fill out the Free Application for Federal Student Aid, or FAFSA. This can be done online with only your name, date of birth, Social Security Number, school information, and current tax and income records. You will need to create a FSA ID, which will act as your electronic signature and give you access to your personal federal financial aid information. You have to fill out a FAFSA every year to remain eligible for federal financial aid.
In addition to your FAFSA, when applying for a Direct PLUS Loan, you will need to fill out a PLUS Application and a credit check will be done. You will also have to complete a Master Promissory Note (MPN), which is a legal contract you sign agreeing to repay the interest and principal of your loan. The MPN also lists your rights and responsibilities as a borrower, and you should keep a copy in a safe place. Usually, you will only have to fill out one MPN for the life of your loan. Most of the time your school’s financial aid office will handle these documents, and many offer the capability of completing them online. Contact your school for more information on the application process for a Direct PLUS Loan.
Direct PLUS Loans are disbursed at least twice a year, usually at the beginning and midpoint of your school year or at the start of each semester or quarter. Loans are generally disbursed directly to the school to pay for education-related expenses, including:
- Tuition and school fees
- Room and board
- Books, supplies, and equipment
- Personal computer purchase or rental
- Dependent child care expenses
The school will apply the funds toward the balance of your school account first and then usually disburse remaining funds directly to you to pay for additional education-related expenses. The school will notify you, or your parent if your parent took out the loan, of the amount and how the remaining funds will be disbursed to you either by check or some other means determined by the school. You should receive a disclosure statement detailing the amount of your loan, disbursement amount, and dates as well as any fees associated with your loan.
For a federal student loan, the U.S. Department of Education is your lender, but the loan is actually managed through an independent loan servicer chosen by the government. Your loan servicer is chosen for you and will be your point of contact through the life of your loan. You will pay your bills directly to your loan servicer when repayment starts. You should contact the loan servicer for any questions regarding your repayment options.
Unlike other federal Direct Loans, Direct PLUS Loans do not have a grace period, or period after graduation before repayment starts. Generally, you will need to start repaying your Direct PLUS Loan within 60 days of your final loan disbursement. There are circumstances in which you can apply for a deferment, however. Deferment is when you loan payments are deferred for a period of time, usually up to six months following graduation, dropping below half-time status, or leaving the school. You may be eligible for deferment if you are a parent borrower also attending school or while your student is still enrolled school at least half-time and for six months thereafter.
You have the choice of either the standard, extended, or graduated repayment plans for a Direct PLUS Loan. The standard repayment plan helps you to pay off your loans faster, meaning you will pay less in the long run. Standard repayment plans give you up to 10 years to pay off your loans with a minimum payment amount of $50 a month. If you have incurred more than $30,000 in federal student loan debt, you may choose the extended or graduated payment plans. The extended payment plan has two options, either through fixed or graduated payments, and gives you up to 25 years to repay your loans. Fixed means you pay the same each month, similar to the standard repayment plan, although with lower monthly payments for a longer amount of time. Graduated repayment plans start with lower monthly payments and every two years your payment amounts increase. This is a good option if you expect your income to rise. Payments will increase gradually, and no single payment will be more than three times the amount of any of your payments.
It is important to remember that while graduated and extended repayment plans will lower your monthly payments, by increasing the repayment period of your loan, you will raise the amount of interest and therefore the total amount you will end up paying over time. If you can afford to pay more per month and pay off your loan faster, you should do so. Most loan servicers have many options to make repayment easy and convenient, including automatic debit, electronic, and phone payments as well as a mail-in option. If you have trouble making payments, contact your loan servicer immediately so you can set something up and salvage your future credit score.
Loan Forgiveness and Forbearance
Sometimes you just cannot make your loan payments and you don’t qualify for deferment. There may be options available to you that will either forgive your remaining debt, or reduce or stop payments for up to 12 months. Loan forgiveness for a Direct PLUS Loan is offered for the following circumstances:
- Death of the borrower or the student the loan was borrowed for
- Permanent disability of borrower or student
- Loan was certified falsely through identity theft
- Loan discharged through bankruptcy
- School closed before program was completed
- School owed a refund that was never paid after student was discharged
- Promissory note was forged by the school
- School falsely certified the borrower was eligible for financial aid
When a loan is forgiven, it means you no longer have to pay it back. Contact your loan servicer for more information regarding loan forgiveness.
Forbearance can either greatly reduce your monthly payments or stop them altogether for a set period of up to a year. Direct PLUS Loans may be eligible for either a discretionary or mandatory forbearance. A discretionary forbearance may be granted for either a demonstrated financial hardship or illness. You have to request the forbearance through your lender, and they decide whether or not you will qualify. Your lender is required to grant you a mandatory forbearance if you meet certain eligibility requirements, including:
- You are a member of the National Guard not eligible for military deferment but activated by a governor.
- You are eligible for teacher loan forgiveness due to performing a qualified teaching service.
- You meet specific requirements while performing a medical or dental internship or residency program.
- Your total student loan monthly payments are more than 20 percent of your total monthly gross income.
- You received a national service award and are serving in a national service position.
- You are eligible for the U.S. Department of Defense Student Loan Repayment Program for at least partial repayment of your loan.
- You are called to active military duty.
Interest will continue to accrue during forbearance. You will likely have to provide documentation to receive a forbearance, and you should check with your loan servicer on how to apply if you think you may be eligible.