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What Is a DIRECT Plus Loan?

No, it’s not a loan that lets you access popular streaming content. But it can get you deep into debt at lightning speed. And debt is never a good idea—even if it’s for school. Let’s take a closer look at Direct PLUS Loans.

What Is a Direct PLUS Loan?

A Direct PLUS Loan is a federal loan to students or their parents from the Department of Education. The idea here is to help you cover any gaps in school costs after you’ve exhausted private loans. The problem with that is loans are never a good option. Whether private or federal, debt sets you way back in your financial goals by tying up your most powerful wealth-building tool—your income.

Students or parents often take out Direct PLUS Loans when they’re already deep in debt and thinking, Hey, this could be the boost I need to make my dreams come true! I’ll just borrow the difference I didn’t get from private loans! Then I’ll pay everything back after graduation. A few years later, the giant monthly payments kick in. Don’t even go there!

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Although there are a few conditions you need to meet to get a Direct PLUS Loan (see eligibility below), it is one of the most flexible (read dangerous) ways to borrow gigantic amounts of money for college or grad school. A couple of key facts:

  • You get a fixed interest rate. (At least it can’t go up!) It’s 5.3% for the 2020–21 school year.1 In case you’re wondering how that hits your wallet, a 10-year payoff on a $100,000 loan would end up making you pay an additional $29,054 in interest—that’s about a third of the principal!
  • You also get an origination fee. For fall 2020, the Direct PLUS Loan fee is 4.236% of the debt.2 So if you’re borrowing $25,000 (a typical price for a year of school), that translates to about $1,059 for the privilege.

We can’t say this too often: Direct PLUS Loans can be as big as necessary to cover any gaps in school costs. They’re like a “Get Into Jail Free” card, except they’re anything but free. There are two categories, so let’s look at both.

Parent PLUS Loans 

One type is aimed at parents, a federal Parent PLUS Loan. PLUS stands for Parent Loan for Undergraduate Students, but it only subtracts from your wealth. Basically these allow you to borrow money for your child to cover undergraduate education, up to the full cost of their school.3 A few facts:

  • These loans are usually set on a 10-year term.4
  • The normal grace period borrowers get with student loans aren’t automatic here. You’ll have to request a deferment if you want one. As long as the child you’re borrowing for remains in school at least half-time, you’re allowed to defer. But within six months of their graduating or dropping out, the repayment schedule begins.5 (If you’re already stuck in one, we recommend paying it off as soon as possible.)
  • Just because you take out a Parent PLUS Loan to cover your child’s costs does not mean they’re responsible for paying it off. Legally speaking you are the one on the hook for this loan. Keep in mind how that could affect your relationship—especially if the child is unable, or unwilling, to help pay it off.6
  • The student must be dependent on you, the parent. You won’t be able to get a federal Parent PLUS Loan for kids who are already off on their own.7
  • Unlike other kinds of student loans, Parent PLUS Loans won’t be eligible for income-driven repayment plans. (The only exception is Income-Contingent Repayment, a 25-year slog you can only get once you’ve done a Direct Consolidation with your own student loans.)8
  • The Student Loan Payment Relief Extension that begins October 1, 2020 does apply to this type of loan. That means if you’re in one now, your repayment is paused and your interest rate is set for 0% for the rest of 2020.
  • You, as the parent, can refinance these loans. But you can’t refinance them in your child’s name.9

Grad PLUS Loans

The other type of Direct Loan is the Grad PLUS Loan. Yeah, we know—they’re not for parents, they’re not for undergrads, but they’re still called PLUS for some reason. (Probably because calling them Loans on Grad School, or LOGS, didn’t test as well.) A few things to know:

  • The grace period for Grad PLUS Loans is automatic. And just like the Parent PLUS version, your payments are deferred so long as you’re enrolled at least half-time. If you drop below that status or graduate, you’ll also have six additional months of grace before the bills start rolling in.10
  • These loans do fall under the Student Loan Payment Relief Extension set to start October 1, 2020.11
  • Unlike the Parent PLUS version, the Grad PLUS Loan is eligible for income-driven repayment plans. Just so you know, most of those are just ways to shift money around and delay paying down debt.12
  • You can refinance Grad PLUS Loans.

Don’t be fooled by the slick marketing around Grad PLUS Loans. They’re promoted as a smart way to pay for school and advance your career. In reality, they seriously S-L-O-W your financial progress.

Am I Eligible for a Direct PLUS Loan?

You probably are. Then again you’re also free to do yoga in traffic, but calling it smart would be a stretch. In the same way, being eligible for debt doesn’t make it a wise move. Let’s see who they give these things to.

These are the criteria:

  • Either a graduate or professional student (for Grad PLUS Loans), or the biological, adoptive or stepparent of a dependent student (for Parent PLUS Loans).
  • U.S. citizen or eligible non-citizen
  • Valid Social Security number
  • Male students registered with selective service13
  • No adverse credit history. Here’s how the government defines that:
    • Being delinquent (more than 90 days behind) on more than $2,085 in debt
    • Having more than $2,085 in debt written off during the two years prior to applying
    • Experiencing any of the following during the last five years: wage garnishments, write-off of federal student aid debt, default determination, foreclosure, tax lien, repossession, bankruptcy14

If you check those boxes, you’re allowed to get into deep doo-doo—errrrr debt—with a Direct PLUS Loan. What a blessing!

How Do I Apply for a Direct PLUS Loan?

Start by going back over everything we’ve already learned about these budget busters, and asking yourself, “Self: Do you really want to wreck your life?” If you said, “Sure, why not?” then here’s how to apply:

  • Fill out the Free Application for Federal Student Aid (FAFSA) at the Student Loans government website.
  • You’ll receive further instructions from your school on how to get into this swindle.
  • They’re gonna want some of your financial information to assess your eligibility.
  • You’ll have to sign something called a Direct PLUS Master Promissory Note. This is where all the gloomy fine print appears spelling out the painful terms of your servitude.
  • In case you get declined for adverse credit history, the government will help you out with suggestions on how to get a friend with stronger credit to co-sign for you (never do this to yourself or your friends).
  • Look forward to paying off debt and interest in the next few years.

Should I Get a Direct PLUS Loan?

How about no? It’s a seriously terrible idea! And if you already have school loans? Millions of people do, and we want you to know it doesn’t define your destiny. People pay them off completely every day! Your best approach to any debt is to get out of it lickety-split! Use the debt snowball method, where you list your debts smallest to largest, attack the little debt first and pay the minimums on the others. As you eliminate each debt, roll the old payments onto the next smallest until you’re debt-free!

Student debt gets sold with lots of hype as a way to turbocharge your career, but the reality is much uglier. The smarter approach to school is to do it debt-free—with cash, side hustles and scholarships! Want to learn a whole lot more about how to cash flow your education? Check out Debt-Free Degree today, your guide to college without loans.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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