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How College PLUS Loans Could Help To Close The College Funding Gap

By: Donald Saunders

As the cost of a college education has continued to rise in recent years students who have depended on traditional Stafford loans have repeatedly discovered that they do not cover most of their expenses. The PLUS program (Parent Loans for Undergraduate Students) was thus introduced and is designed to close the gap between the sum provided by student loans and the cost of education.

Though the interest rate is higher than other types of loan the ceiling on borrowing is far more flexible and the loans are not restricted by being need-based.

In the case of the FFEL program (Federal Family Education Loan) for which funds are provided by private lenders the interest rate is currently 8.5% and loans funded through the US Department of Education under the Direct loan program are currently charged at 7.9%. The difference of just 0.6% might seem insignificant but can turn out to be significant when viewed over the lifetime of the average loan.

With PLUS loans parents are allowed to borrow up to the full cost of a child's education less any other financial aid amount that the child is awarded. Although PLUS loans are not exactly cheap they can frequently make a difference when deciding which college to attend or indeed whether to attend at all.

But, since PLUS loans are not based upon need, they do need a credit check for approval. Generally it is of course the parent's rather than the student's credit that is considered since the parent is signing the promissory note and is responsible for meeting repayments on the loan.

In those rare cases where the parent's credit history makes him or her ineligible for a PLUS loan a co-signer can participate in the loan and a relative or other third party can agree to guarantee repayment and assume legal responsibility as a co-borrower. With the recent difficulties in the sub-prime borrowing arena however such cases are unfortunately more common than they once were. That suggests that the requirement for a co-signer is becoming more likely in borderline cases.

Apart from interest rate changes another recent change to the program is its extension to permit graduate and professional students to obtain PLUS loans. The same interest rates and eligibility criteria apply and they have to be enrolled at an appropriate institution and on a qualifying program.

Different from many student loan programs, repayment of PLUS loans starts right away and the initial payment is normally required within 60 days after the loan monies are disbursed. Interest starts to build up from the time the first payment is made and both interest and principal must be paid in regular monthly installments during the time that the student is in college. Payments need to be made to the private lender in the case of FFEL loans and to a US Department of Education servicing center for Direct loans.

Make sure that you work out all the costs associated with obtaining a PLUS loan carefully and view it as a loan of last resort. Even something like a home equity loan might well be cheaper since the interest payments are tax-deductible.

Article Source: Main Articles

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