Should I Get A PLUS Loan?

Here’s why: Unlike scholarships or grants, PLUS loans are not need-based. Parents can borrow up to 100% of the estimated cost of their child’s college attendance, including tuition, room and board, books, transportation and additional expenses, minus any other financial aid awarded to the student – and they can do so retroactively to cover educational costs they’ve already incurred for the current school year.

Other PLUS loan benefits include tax deductibility of PLUS loan interest payments and a favorable interest rate, which can be further reduced with borrower benefits such as those offered by financialaid.com.

Selecting the best college funding options for your family will depend on your specific financial circumstances and personal preferences. In the end, most families pay their portion of college costs using some combination of disposable income, savings, and long term financing.

Let's take a look at two potential PLUS loan scenarios...

The Johnsons
The Johnsons are one of the increasingly rare families lucky enough to have sufficient liquid assets to cover their child's college costs. In their case, they can choose to sell some of their investment portfolio and write a check for the entire amount due, or they might opt to take advantage of today's low interest rates to finance school with a PLUS loan. This second option may prove to be more fiscally sound, as it will allow their investments to continue to appreciate (typically at 6-10% a year), while they borrow money at approximately 3% interest. Even if the Johnsons change their minds down the road and decide to cash-out stocks to pay for college, they have the option of prepaying their PLUS loan without penalty.

The Howards
The Howards, like most American families, are not in a position to simply put pen to paper and write a big check for their child's college tuition. They are currently considering taking out a second mortgage or home equity line of credit and/or potentially charging part of the tuition on a credit card.

They should dismiss the credit card option out-of-hand, as they could end up paying 20% interest or more to finance their child's education. Most often in this situation, parents will turn to either a home equity line of credit or a PLUS loan, so we'll compare these two options here.

Home equity loans/Second mortgages
Many parents choose these financing options because they are readily available - assuming they have equity in their home and good credit. Another benefit of loans tied to your home is that the interest accrued is usually deductible on a federal tax return.

PLUS loans
PLUS loans, on the other hand, are even more readily available than home equity loans due to the easy application process and gentle credit requirements of the PLUS loans. However, only certain families qualify for interest deductibility on a PLUS loan (consult your accountant).

Although not always interest deductible, PLUS loans have two features that minimize risk for parents:

1. The variable interest rate on a PLUS loan is capped at 9% for the life of the loan, whereas the rate on a home equity loan will rise with the market and not stop at 9%.

2. PLUS loans are not secured by a personal asset (i.e., your home). Unfortunately, families sometimes experience bad luck such as job loss, illness or worse. If the parent borrower of a home equity loan is unable to make a loan payment for these reasons, his or her home will be put at risk. With a PLUS loan, parents have more leeway in deferring payments during hard times, or having the loan forgiven in the case of the death of the borrower.

Overall, today's PLUS loans offer the most flexibility and benefits to parents paying for their child's college education. For more information on how to quickly and easily obtain a PLUS loan with financialaid.com, Click Here.