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Overall Satisfaction

PLUS loans get an A from many borrowers
Written By: Jeffrey Steele, Chicago Tribune

Experts and parents of college-age children say the federally subsidized program can ease the burden of high tuition costs.

When Sheila and Jeff Schumacher of Eureka, Ill., sent their daughter Kati off to Illinois Wesleyan University in Bloomington this fall, they realized they couldn't simply write a check for the entire year's tuition. They had the funds for one semester, but not for two.

"We knew we had to find money elsewhere, some type of loan," Sheila said.

What she found after an Internet search was the Parent Loan for Undergraduate Students (PLUS) loan program, a federally subsidized educational loan program allowing families with college-aged children to borrow an amount up to the entire cost of an undergraduate college education, minus the sum covered by grants, scholarships or other financial aid.

PLUS loans aren't based on financial need. What's more, they don't require collateral, as long as the parents qualify based on credit history.

"A PLUS loan doesn't have to be secured by a personal asset," Sheila said. "If something happened down the road, where we wouldn't be able to make a payment, it wouldn't put our house at risk. With a PLUS loan, if you have hard times, you have more leeway."

As parents of college-aged students have watched their investment portfolios decline in recent years, PLUS loans have become a more popular option,said Gen Tanabe, who with his wife, Kelly, wrote "1,001 Ways to Pay for College" (SuperCollege, 2003).

Parents who might never have thought of a student loan now strongly consider the PLUS loan route as a way of avoiding selling chunks of their portfolios at a loss, Tanabe said.

Another reason for the interest in PLUS loans is the program's egalitarian provisions, said Michael O'Brien, chief executive of FinancialAid.com, a San Diego company that helps families deal with escalating college costs by acting as a student loan broker.

The sticker shock of today's college educations can leave even families with annual incomes of $100,000 to $150,000 struggling to find ways to finance a sheepskin.

"This product is indeed a form of financial aid that everyone truly qualifies for," O'Brien said.

David Charlow, director of financial aid and educational financing at Columbia University in New York, said once they discover the PLUS loan, parents find it a compelling financing option.

"It has low interest with a cap, a gentle credit check and flexible repayment options," he noted. "They like the comfort level of knowing that if something goes crazy with interest rates during repayment, typically a 10-year term, they have the security of knowing it's capped."

In fact, PLUS loans seem to offer something for everyone, from tax deductibility for many families to the chance to borrow retroactively.

So why aren't more parents aware of the PLUS loan program? Kalman A. Chany, author of the 2004 edition of "Paying for College Without Going Broke" (The Princeton Review), reports the loan's benefits aren't explained by colleges.

"The colleges aren't going to specifically recommend you take out a PLUS loan," Chany said. "They'll say, `Here are the options to look at.' The colleges are never going to advise you on a specific course of action to follow. In other words, you have to become an expert."

Many parents who gain that expertise in college financing options end up convinced PLUS loans are aptly named. For one thing, qualifying for PLUS loans requires only a simple credit check, O'Brien said. In brokering PLUS loans, Financialaid.com ensures borrowers have had no bankruptcies, defaulted student loans or tax liens, and have made all payments in the past 30 days.

"There's no income scoring or cash-flow analysis," O'Brien said. "So long as you meet those criteria, the government will guarantee it through the federal PLUS program."

Once they qualify for a PLUS loan, parents can use the loan to borrow up to 100 percent of their children's college expenses. That means not only tuition, room and board, but books, travel and other expenses involved in the pursuit of an undergraduate degree.

There's also the advantage of low rates. Interest rates on PLUS loans are currently set at 4.22 percent through June 30, 2004, said Chany.

However, some lenders are offering even lower rates on PLUS loans. According to Chany, the variable interest rate of the PLUS loan is tied to the 91-day Treasury bill rate, plus 3.10 percent, and has a cap of 9 percent.

Because the rates are expected to rise, Chany is advising some of his clients to consider borrowing the maximum this year, even if they don't need all the money. He's urging them to then consider consolidating their loans before July 1 if it appears the PLUS loan interest rates will rise for the next academic year. By consolidating, the loans will be locked in at an interest rate fixed at the time of consolidation.

Unlike with Perkins and Stafford student loans, borrowers can consolidate a PLUS loan even if the student is still in school, Chany said.

Repayment of PLUS loans generally starts 60 days after receiving the loan, but some lenders let borrowers defer repayment for several years, Chany added. And unlike a home equity loan, which can jeopardize a borrower's home in the event of financial hardship, PLUS loans may be deferred if a job loss or an illness interferes with payment, according to O'Brien.

PLUS loans can even be obtained to cover expenses already incurred in the current academic year, he said. For instance, parents can borrow the money expended for the previous semester's tuition. If they used a home equity line or withdrew money from their IRAs to finance that term, they can simply pay that money back with the proceeds from the PLUS loan.

All these positives notwithstanding, there are a couple of potential pitfalls to the PLUS loan program, Tanabe said. He notes to get a PLUS loan, families aren't required to complete the Free Application for Federal Student Aid (FAFSA).

While many would consider that a good thing, it spurs some PLUS loan borrowers to avoid the FAFSA altogether, an act of omission Tanabe doesn't encourage.

By completing the FAFSA, parents are eligible for state and federal grants, "free money" that, unlike student loans, doesn't have to be paid back, he said. Completing the FAFSA is also essential to allow families to apply for Stafford student loans. That's an appealing option because a subsidized Stafford loan pays the interest on the loan while the student is completing college.

In addition, the FAFSA is like an insurance policy for the future, Tanabe said.

"If one of the parents loses his or her job in the student's sophomore year, and they've completed the FAFSA prior to the student beginning college, it's much easier for that college financial aid office to help the student by giving him or her more money," he said.

"The FAFSA gives the college a snapshot of what a family's finances were like when the student entered the college. The college can see the impact of a loss of, say, $40,000 from the job that was lost."

One other disadvantage, Tanabe said, is that PLUS loans are sometimes viewed as parent loans rather than student loans. With conventional student loans, students are responsible for making payments and paying interest, he noted. With PLUS loans, it's the parents' responsibility.

Many parents justifiably believe students should take responsibility for loans, and that doing so will increase their appreciation of a college education, Tanabe said. "This is not so much a financial question as a family issue," he observed.

For many families, however, PLUS loans have proven a tool too valuable to overlook, one that may make the difference in clearing the financial obstacles involved in college funding.

Sheila Schumacher, lamenting the fact she and her husband never recouped the money they withdrew from a retirement account to finance their son Josh's college education, sees more PLUS loans in her future.

"I'm probably looking at getting another one of these next year. The payments are like $50 a month. It's very low," she said. "I don't see any negatives in it."