Understanding Parent PLUS Loans: Benefits, Risks, and Alternatives
Parent PLUS loans are federal student loans that parents of dependent undergraduate students can use to help pay for college costs not covered by other financial aid, but these loans come with significant considerations that many families overlook in their eagerness to fund education.
Unlike subsidized and unsubsidized student loans, which have borrowing limits and more favorable terms, Parent PLUS loans allow parents to borrow up to the full cost of attendance minus other financial aid received—a feature that can lead to dangerous over-borrowing.
The current interest rate for Parent PLUS loans is substantially higher than undergraduate student loan rates (typically 2-3 percentage points higher), and includes a 4.228% origination fee deducted from each disbursement, meaning a $10,000 loan actually only provides $9,577 to the family.
Perhaps most concerning, Parent PLUS loan repayment begins immediately, with no grace period after disbursement and limited income-driven repayment options compared to student loans.
Standard repayment over 10 years creates substantial monthly payment burdens—a $40,000 Parent PLUS loan at 8% interest requires approximately $485 monthly payments for 10 years, totaling $58,200 in principal and interest.
For parents nearing retirement age, these payments can devastate retirement savings and financial security, particularly since Parent PLUS loans are not discharged in bankruptcy except under extreme hardship circumstances and continue even if the student doesn't complete their degree or can't find adequate employment.
The loans do offer some federal protections: fixed interest rates (unlike private parent loans), death or disability discharge, and access to income-contingent repayment (ICR) after consolidation, though ICR for Parent PLUS loans is less generous than income-driven plans available to student borrowers.
Many financial advisors caution against Parent PLUS loans except as a last resort, recommending instead that families: have students maximize their own federal student loans first (which offer better rates, terms, and eventual income-driven repayment access), explore private student loans in the student's name with parents as cosigners (allowing eventual cosigner release and building student credit), consider lower-cost schools or community college transfers, increase student work-study and summer employment, or have parents redirect retirement contributions temporarily to cash-flow education expenses.
The emotional dimension of Parent PLUS borrowing is significant—parents want to help their children achieve educational goals and may feel pressure to match peer families' contributions—but sound financial planning requires honest assessment of borrowing capacity, retirement timeline, and the reality that parents have no time to recover from education debt like students do.