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Direct PLUS Loans, Better College Loans for Parents and Grads

The switch to Direct PLUS loans from private loan lender/federal loans will benefit parents and help to fund other programs.

Unlike other federal student loans, PLUS loans have lower interest rates under the Direct loan program, compared to the FFELP.

Borrowers will now pay a federal interest rate of 7.9% instead of 8.5%.

These rates are for Grad PLUS as well as Parent PLUS loans.

As far as loan fees go, federal Direct PLUS loans have a 4% origination fee, but they also give a 1.5% upfront interest rebate, for a total fee of 2.5%. (This rebate will be added back to the principal if any of the first 12 payments are missed.)

FFELP PLUS loans had fees which were between 3 and 4%.

Federal Plus Loans Approval Rates

Another advantage that borrowers will have now is that approval rates will go up. Under the Direct loan program, there are strict guidelines about how borrowers' credit should be considered:

More than a 90 days delinquency should be regarded as a bad credit score

(Between January 1, 2007 and December 31, 2009, it was more than 180 days for a mortgage or medical bill payment.), or

A default, a bankruptcy, foreclosure, repossession, tax lien, wage garnishment, or write off of an FSA debt going back 5 years only

Under the FFELP, lenders were allowed to turn down applicants using more rigid credit requirements. The effect on approval rates for parents was easy to see, because their children became eligible for a higher unsubsidized Stafford loan limit. There were about twice as many turn-downs for parents under the FFELP than under the Direct loan program.

The effect on Grad PLUS applicants was not as clear to see, because these students did not become eligible for more Stafford money. (Regulations for both programs state that applicants cannot be rejected for PLUS loans because they have no credit history.) The rejection rate was probably comparable, though.

These are the projected subsidy rates for each type of Direct loan (across the lifetime of the loan) according to the Department of Education's Fiscal Year 2011 Budget Request:

Type of Loan	Profit or Loss (per $1,000 loaned)
Subsidized Stafford Loans	$100.10 loss
Consolidation Loans	$18.00 profit
Unsubsidized Stafford Loans	$166.60 profit
PLUS Loans	$227.30 profit

The federal government wants to lend as many PLUS loans as it can, because these are the loans which are the most profitable, or (to use federal accounting-speak) have the highest "negative subsidy rate".

Direct PLUS loans help pay for subsidized loans and Pell grants. Now this program is getting some competition from private lenders, such as Wells Fargo student loans. If these products are successful in luring away borrowers, federal rates might drop.

Student Debt Consolidation Loans

Direct PLUS loans can be consolidated with FFELP loans under the Direct loan program. However, think carefully before consolidating PLUS loans with Stafford undergraduate loans. The income-based monthly payment formula and loan forgiveness will no longer be an option if a PLUS loan is used for Direct loans consolidation.

If you would prefer to cosign a loan for a student, rather than borrow the money yourself, you will need to research private student loans.

Find College Loans

Direct PLUS loans borrowers have definite advantages over FFELP PLUS borrowers. These will continue so that the federal government can maximize Pell grant and other education subsidies.

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