Parent PLUS Loans: Understanding the Numbers
“I felt like her future was at stake. What would any mama do?”
Last week my post focused on understanding the numbers around student loan debt - from the student’s perspective. I invite you to check it out as it will give you a good background before we dive into numbers around another type of federal loan - Parent Plus loans (I will use P+ throughout this article to save space and time).
Unlike federal direct loans, which are taken out by the student, Parent PLUS loans are taken out by - you probably guessed it - the parent(s). These loans may not be transferred to the student - they are “owned” by the parent borrower. Students are limited by how much they can take out in federal direct loans, but this type of ceiling limit doesn’t really exist for P+ loans. This is a blessing and a curse. P+ loans are federal loans that are available to parents of undergraduate students who are enrolled at least half-time in an eligible program at a participating school. The loans are designed to help parents cover the cost of their child's education expenses that are not covered by other financial aid, such as grants, scholarships, and other student loans.
In other words, they are made available to cover the cost gap after any discounts, scholarships, grants, or loans taken out by the student are calculated.
The use of P+ loans is on the rise and probably will continue to increase for the forseeable future, in my opinion. But like any loan, it’s important to truly understand these loans and their terms so you can be an educated consumer.
Let’s start by looking at some introductory numbers to understand the growth trajectory in P+ loans.
According to the National Student Loan Data System, the graph below shows the number of P+ loan borrowers from 2014 to end of 2022:
Number of Parent PLUS loan borrowers (in millions)
So, the numbers tell us that from 2014 to 2022, the number of P+ loan borrowers increased approximately 16%.
How does this correlate to the total amount of P+ loans taken out?
Fortunately, the same dataset from NSLDS gives us the answer to this question, and is shown on the following graph.
Parent PLUS Loan Outstanding Amounts (Billions of Dollars)
See a trend here?
While the number of borrwers has gone up 16%, the total of outstanding P+ loans has increased from $65.1B to $108.5B in eight years for an increase of nearly 67%.
The average amount of Parent PLUS loan per borrower is approximately $29,000. That’s an average which means some have more and others have less. Here’s an article highlighting an extreme example of Parent PLUS borrowers.
So what’s driving this increase? Well, there are smarter people with PhDs writing articles and books about this, but I generalize that it comes down to three drivers:
Overall increase in cost for college
Increased access to P+ loans, especially for low income families
Student and family college choice
I’m going to stick with the numbers so we can understand how P+ loans add to a family’s debt load. As with all loans, in order to truly understand the cost we need two more pieces of information - interest rate and payback length.
First, let’s start with a little known fact that Parent PLUS loans carry a loan fee. Some people call this an "origination fee”. Regardless of the term, this means that a portion of the loan will be deducted from the amount before you even use it. How much? The below graphic from Federal Student Aid shows the loan fee to be 4.228%. Seriously, it couldn’t be 4.2%?
So, let’s assume that a borrower takes out a P+ loan for $10,000 to cover a gap for their first-year college student. This means that although the loan amount is for $10,000 the loan fee will take $422.80 off the top. This means they will actually have $9577.20 ($10,000 - $422.80) to use towards the college bill.
Bummer. Really.
Now let’s move on to the interest rate. Federal Student Aid currently tells us that the interest rate for P+ loans is 7.54%, or 2.55% higher than the interest rate for student federal direct loans. This rate is fixed for the life of the loan but remember that it can potentially change for subsequent P+ loans. As with federal direct loans for students, a borrower would initiate a new P+ loan each subsequent year as necessary.
Important note: P+ loans are unsubsidized which means interest accrues immediately following disbursement. There is no period of time where interest is deferred or subsidized while the student is attending school.
Now that we know the assumed interest rate, we need to know the length of the loan. Well, the feds make this relatively easy for us. Although there are different loan payback plans, the standard and default plan is based on a payback period of 10 years, just like the federal direct loans for undergrads.
Now that we know three critical pieces of information - loan amount, interest rate, and payback period - we can figure out the monthly debt load.
There are many loan debt calculators out there, but one of my favorites is this one from Smartasset. Let’s use the national average loan debt information I stated previously for our calculation.
Loan amount - $29,000
Interest rate - 7.54%
Payback period - 10 years (120 months)
…take 60 seconds to think through these numbers yourself - can you estimate how much this will be each month? Think you have it?
Let’s see what the calculator tells us.
The calculator demonstrates that the borrower will pay $345 every month for the next ten years. This is in addition to any federal direct loan taken out by the student. But, as with all loans this is just part of the story. Let’s figure out how much you will actually pay for that loan. In other words, the principal of $29,000 will be how much when all is said and done due to interest?
Let’s return to the handy calculator and find that the total of this loan is $41,381. In other words, on a principal amount of $29,000 the actual amount paid over 10 years is nearly 43% more.
How does restructuring your payback length change the monthly and total payment amounts? Find out in the following graphs.
Monthly Amounts in Dollars Based on Debt Loan Length
Total Loan Amount Based on Payback Length
To summarize, as you extend your time the monthly payment decreases but the actual total amount to be paid is much more than the original principle of $29,000. How much more? Consider these numbers:
10 years - $41,381 (43% more than the principle)
15 years - $48,509 (67% more than the principle)
20 years - $56,240 (94% more than the principle)
While Parent PLUS loans are an option made available to many families today, it’s important that the student and family understands the actual costs associated with these loans. As you can see these loans add up very quickly for various reasons, including:
Higher interest rates than federal direct loans for students
No ceiling limit for borrowers - borrowers may borrow the full gap of what is needed to cover the Cost of Attendance
Interest accumulates immediately following disbursement (no deferment or subsidies)
Impactful loan origination fee
Learn more about Parent PLUS loans from borrowers and students in this article from The Hechinger Report.
The use of loans should be openly discussed between the college-bound student and parent(s). Cost and affordability are critical and are directly tied to the choice of a particular school. Understanding the true cost of an education for everyone involved is key to reduce the chance of walking into surprise or phantom costs.
I empower college-bound students and families with the knowledge, tools, and confidence for college success. Let me guide you through the complexities of college admissions and beyond, so you can create your boundless life.
Have a question or comment? Please leave it in the comment section below or contact me at mark@mastalskicoaching.com.
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