Edufacts™
July 2007
Federal PLUS loans offer parents another option for paying for college
Despite favorable terms, few parents use PLUS loans to finance children's education
Many people associate the start of college with the excitement of opening acceptance letters, moving into the dormitory, and meeting new friends. But before students attend their first lectures, families must perform a less exciting but necessary ritual: figuring out how to pay for it.
While some students qualify for scholarships or grants, many more need student loans to finance their college educations. In 2004, 35 percent of all postsecondary students borrowed money through the Federal Stafford Loan Program.
But Stafford loans are not always enough: first-year students, for example, are limited to $3,500 for their first two semesters. This amount falls far short of a year's worth of expenses at many educational institutions. Loans amounts, however, increase to $4,500 the second year and to $5,500 for the third year and beyond.
One way to fill the gap is through the Federal PLUS Loan Program, which allows parents to borrow the full amount needed to make up the difference. When compared to private loans, PLUS loans offer favorable terms, including a lower interest rate (currently fixed at 8.5 percent), flexible repayment options, no need for collateral, and a 10-year repayment period. Parents also are eligible for periodic repayment deferment under certain conditions.
About 225,000 PLUS loans were made a decade ago, and that figure has now more than doubled to 665,000. The size of the average PLUS loan has also increased dramatically, from a little more $6,000 in 1996-1997 to nearly $12,000 in 2006-2007.
Amy Carcanagues, Director of Financial Assistance at University of the Incarnate Word in San Antonio, has observed this surge in PLUS loan borrowing firsthand. 'We've noticed a definite increase over the last few years," she says. "For a while, private loans were very popular, but as their interest rates have started to bounce around, we've seen more parents coming back to the PLUS. The fixed interest rate and the deferment and repayment options make a big difference."
The reason for the increase in parent borrowing can also be found in the changing demands of today's job market. As manufacturing jobs have disappeared from the American employment landscape, a larger percentage of jobs have required a higher level of education. More and more people are going to college in order to obtain the skills they need to be employable in their preferred fields.
At the same time, college costs have soared, leading to a situation where more parents find themselves unable to finance their children's educations. While many used to dip into savings and even retirement plans to help pay for college, this is becoming increasingly impossible for many families.
Despite these factors, however, this loan program is still relatively unknown to a majority of families. Only 3 percent of parents with college-going children borrowed PLUS loans in 2004.
Anne Walker, Financial Aid Director at Rice University, suggests one reason that more parents are not borrowing through the PLUS program is a lack of knowledge about all their options.
"Unless the financial aid office is telling parents about PLUS loans, they often don't know they are available. Many schools leave it up to the parent to initiate," Walker says.
Other reasons for the small percentage of PLUS loans may include the availability in some areas of state loan programs with lower interest rates. Many families also have trouble with the required credit check — while relatively lax by the standards of private lenders, it remains a barrier to borrowing for many parents.
For complete information about PLUS loans and how to apply, visit http://www.tgslc.org/borrowers/loans/plus.cfm.
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For tips on how to establish high expectations for students as early as middle school and for assistance in planning for higher education academically and financially, visit www.AIE.org. TG provides this Web site has a public service to help all families and students achieve their educational goals and career dreams.
About TG
TG is a public, nonprofit corporation that administers the Federal Family Education Loan Program (FFELP). High resolution files suitable for publication are available as a free download from TG's Web site at http://www.tgslc.org/edufacts/index.cfm. For more information, please e-mail or call ray.perez@tgslc.org or (512) 219-4990.
