Maintained for Historical Purposes

This resource is being maintained for historical purposes only and is not currently applicable.

Federal Family Education Loan Programs: Federal Stafford Loans, Federal PLUS, and Federal Consolidation Loan Programs - Federal Plus Loans

AwardYear: 1996-1997
EnterChapterNo: 10
EnterChapterTitle: Federal Family Education Loan Programs: Federal Stafford Loans, Federal PLUS, and Federal Consolidation Loan Programs
SectionNumber: 4
SectionTitle: Federal Plus Loans
PageNumbers: 37-43



As explained in Section 3, the Omnibus Budget Reconciliation Act
of 1993 eliminated the Supplemental Loans for Students (SLS)
Program (formerly covered in this section). Effective for periods of
enrollment beginning on or after July 1, 1994, the SLS Program was
merged into the unsubsidized Stafford Loan Program. SLS loans will
be mentioned in this section only as they affect PLUS Loan
procedures. For details on SLS loans made before July 1, 1994,
please refer to Chapter 10, Section 4 of The Federal Student
Financial Aid Handbook, 1993-94.

Forbearance, cancellation, default, and other provisions common to
all FFEL Programs, as well as to the Federal PLUS Program, are
covered in Section 6.

LOAN LIMITS

[[NEW]]
Federal PLUS Loans are limited to parent borrowers. A parent, as
defined in the General Provisions regulations (Section 668.2) is a
person’s natural or adoptive mother or father, or legal guardian. As
explained in the December 1, 1995 Federal Regulatory Review Final
Rule effective July 1, 1996, the definition of a parent also includes
the spouse of a parent who remarried, if that spouse’s income and
assets would have been taken into account when calculating a
dependent student’s EFC.

Please note that a PLUS Loan may not exceed the student’s
estimated cost of attendance (COA) minus other financial aid
awarded during the period of enrollment.

As mentioned under "Borrower eligibility" in Section 1, as of July 1,
1995 a parent with an adverse credit history who is ineligible for a
PLUS Loan may still receive a loan by securing an endorser who
does not have an adverse credit history. The provision that enables a
parent with an adverse credit history to secure an endorser without
adverse credit was published November 29, 1994.

[[Adverse credit history provisions for PLUS borrowers]]
Regulatory criteria for determining adverse credit history have been
established by the Department. Definition of adverse credit history
was provided in a final regulation published June 28, 1994. The
following text is taken directly from section 682.201 of the
regulations.

Unless the lender determines that extenuating circumstances existed,
the lender must consider each applicant to have an adverse credit
history based on the credit report if

- the applicant is considered 90 or more days delinquent on the
repayment of a debt;

- the applicant has been the subject of a default determination,
bankruptcy discharge, foreclosure, repossession, tax lien, wage
garnishment, or write-off of a Title IV debt, during the five years
preceding the date of the credit report.

A lender may establish more restrictive credit standards to determine
whether the applicant has an adverse credit history. The absence of a
credit history is not an indication that the applicant has an adverse
credit history.

[[NEW]]
A September 1995 Dear Colleague Letter (GEN-95-40) explains that
a PLUS applicant who has been the subject of a bankruptcy
discharge during the five years preceding the date of the applicant’s
credit report is considered to have an adverse credit history. Such an
applicant can then either prove that extenuating circumstances exist,
if applicable, or can find a creditworthy endorser. However, "a
prospective endorser of a Federal PLUS loan may be considered as
being insufficiently creditworthy because of a previous or pending
bankruptcy."

[[Unsubsidized Stafford may be permitted after PLUS denial]]
As mentioned previously, circumstances such as an adverse credit
history prohibit a dependent undergraduate student’s parents from
borrowing a PLUS. However, a dependent undergraduate student
whose parent is unable to borrow under PLUS is allowed the loan
limits applicable to an independent student under the unsubsidized
Stafford Loan Program. The financial aid administrator must put in
writing the reason the parent is unable to borrow a PLUS, provide
supporting documentation (such as a letter of denial of a PLUS loan
from a lender), and keep the information in the student’s file.

INTEREST RATES

[[PLUS interest rates are variable; adjusted each year]]
PLUS Loans for which the first disbursement was made on or after
July 1, 1987 through September 30, 1992 have a VARIABLE
interest rate, to be determined on June 1 of each year according to a
prescribed formula. The rate is effective July 1 through June 30. The
interest rate for PLUS loans from the first period mentioned must not
exceed 12%, and the interest rate for PLUS loans for the period from
July 1, 1993 through June 30, 1994 was 6.79%. From July 1, 1994
through June 30, 1995, the rate was 8.53%. From July 1, 1995
through June 30, 1996, the rate is 9.13%.

PLUS loans first disbursed on or after October 1, 1992 through June
30, 1994 also have a variable interest rate, determined on June 1 each
year. However, the interest rate for these loans may not exceed 10%.
The variable interest rate for these PLUS loans for the period from
July 1, 1993 through June 30, 1994 was 6.64%. From July 1, 1994
through June 30, 1995, the rate was 8.38%. From July 1, 1995
through June 30, 1996, the rate is 8.98%.

The variable interest rate for a PLUS loan disbursed on or after July
1, 1994 but prior to July 1, 1998 must not exceed 9%. The rate is
determined on June 1 of each year and is effective for the following
July 1 through June 30. The bond equivalent rate of the 52-week
Treasury Bills (auctioned at the final auction held prior to June 1
each year), plus 3.1% of that amount, equals the variable interest
rate. For the period July 1, 1994 through June 30, 1995, the rate was
8.38%. For the period July 1, 1995 through June 30, 1996, the rate is
8.98%.

Parents with PLUS loans should understand that annual adjustments
in interest rates may alter monthly payment amounts. Or, the lender
may keep the monthly payment amount the same but increase (or
decrease) the number of payments required to reflect the increase (or
decrease) in the annual variable interest rate.

[[No interest subsidy for PLUS]]
There is no interest subsidy for PLUS borrowers; the borrower is
responsible for all interest that accrues on the loan while the student
is in school and during periods of deferment, according to the terms
of the repayment schedule.

ADDITIONAL COSTS OF BORROWING

The maximum insurance premium that a guaranty agency may
charge the lender of a PLUS is a one-time fee not to exceed 1% of
the principal amount of the loan. (Formerly, a guaranty agency could
charge a lender a fee not to exceed 3% of the loan principal.) If the
lender passes this charge on to the borrower, the fee must be
deducted proportionately from each loan disbursement.

For loans first disbursed on or after July 1, 1994 for periods of
enrollment beginning on or after that date, the origination fee on a
PLUS was reduced from 5% to 3% of the loan principal. Lenders
must deduct (or collect) the origination fee proportionately from each
loan disbursement.

REPAYMENT

The repayment period for PLUS loan borrowers begins on the date
the last disbursement is made. More information on PLUS loan
disbursement is found under "Requirements for Disbursement" in
Section 8. The repayment period for PLUS borrowers ends no later
than 10 years after repayment begins, excluding periods of deferment
or forbearance.

[[PLUS loans must be multiply disbursed]]
For PLUS borrowers, the first payment of interest and principal is
due within 60 days after the loan is fully disbursed unless one of the
deferment conditions described below applies.

[[Capitalization of interest during deferment]]
DEFERMENT OF PLUS LOANS IS FOR PRINCIPAL ONLY. The
borrower must pay all interest that accrues on the loan after
disbursement according to the terms of the repayment schedule (sent
to the borrower when repayment begins). However, a lender may
agree to capitalize the interest (add it to loan principal) when
repayment of the principal begins or resumes. (See the explanation of
capitalization in Section 6.) Interest that accrues during a deferment
may be capitalized no more frequently than quarterly. Procedures for
capitalization of interest under different deferments may vary. The
borrower should be instructed to read his or her promissory note and
check with the lender or guaranty agency for details on capitalization
of interest. If a borrower agrees to pay interest during deferment but
fails to do so, the borrower will be considered delinquent. The
minimum annual payment on a PLUS loan is $600 (the combined
total of $600 is the required minimum on all the borrower’s FFEL
loans if the borrower is also a student borrower).

There is no prepayment penalty for PLUS loans. Lenders may agree
to a standard, graduated, or an income-sensitive repayment schedule
for PLUS loans, as long as minimum annual payment and maximum
time periods for loan repayment are met. The Department
encourages lenders to provide borrowers flexible repayment
schedules as long as payments at least cover interest charges. If a
graduated repayment schedule is established, however, no single
payment can be more than three times greater than any other
payment.

Section 682.209(a)(6) of the FFEL regulations provides lenders with
guidance on implementing the standard, graduated, and income-
sensitive repayment plans. Please refer to pages 10-27 to 10-28 of
Section 2 for additional information.

If, after obtaining a PLUS, the student for whom the parent borrowed
enrolls less than half time or does not enroll at all during the period
for which the loan was intended, the entire amount is immediately
due to the lender. It is the parent’s responsibility to notify the lender
of the date on which his or her child (for whom the parent has taken
out a PLUS Loan) ceases to be enrolled at a participating school at
least half time. The school also must promptly inform the lender
when the student for whom the parent borrowed drops below half-
time status. (See the information on establishing a withdrawal date
under "Repayment" in Section 2.)

DEFERMENT

PLUS Loan borrowers may postpone loan repayment under certain
conditions, but as mentioned earlier, the borrower must pay the
interest on PLUS Loans during a deferment period. The borrower
must request a deferment either verbally or (more often) on a form
provided by the lender. Because the repayment period on a PLUS
begins on the date of last disbursement, a deferment covering such a
loan would also begin on the date of the last loan disbursement.

A PLUS loan application certified by the school may be considered
by a lender as a request for deferment of principal while the student
for whom the parent borrowed is in school--as long as the borrower
requests a deferment by checking the appropriate box on the
application.

The following deferment provisions apply to PLUS Loan borrowers
with outstanding loans disbursed before July 1, 1993, as well as to
FFEL borrowers with outstanding loans disbursed on or after July 1,
1993:

- Full-time study by the parent borrower at an eligible school. (See
Section 2 under "Deferment" for the definition of an eligible
school for the purpose of these deferments).

- Study by the parent borrower in an eligible graduate fellowship
program, including a recognized graduate international fellowship
program at a foreign university.

- Study by the parent borrower in a rehabilitation training program
for disabled individuals.

- Up to three years during which the parent borrower is temporarily
totally disabled or during which the parent borrower is unable to
work because he or she is caring for a spouse or other dependent
who is temporarily totally disabled.

- Periods of unemployment totaling up to two years (if the parent
borrower is seeking but unable to find full-time employment
during those periods).

- Or full-time study by a dependent student for whom the parent
borrowed a PLUS Loan (as long as the student is still dependent
and meets the conditions for an in-school deferment). Such
conditions follow:

- The student must attend an eligible school. Deferment is also
permitted for a dependent student’s half-time study if the student
is a new borrower and obtains a Stafford Loan for the same
enrollment period.

- The student must attend an institution of higher education or a
vocational school which is operated by an agency of the federal
government.

- Or the student must enroll in an eligible graduate fellowship
program or in an approved rehabilitation training program for the
disabled.

An additional PLUS Loan deferment provision applies only to new
borrowers who, on the date the promissory note is signed, has no
outstanding balance on a FFEL (made before July 1, 1987) for a
period of enrollment beginning before July 1, 1987: this is a
deferment authorized for periods when the parent borrower is in
school at least half time (as long as the parent borrower has obtained
a subsidized or unsubsidized Stafford Loan for the same enrollment
period).

The following deferments apply to the FFEL borrower who is a new
borrower (that is, a borrower with no outstanding balance on any
FFEL) on the date the loan is applied for, and whose first loan
disbursement is made on or after July 1, 1993. To qualify, the
borrower must meet one of the following conditions.

- at-least-half-time study at an eligible school;

- study in an eligible graduate fellowship program (including study-
abroad programs);

- study in an approved rehabilitation training program for the
disabled;

- up to three years during periods in which the borrower is seeking
but is unable to find full-time employment;

- up to three years during periods of economic hardship (as
determined by the lender). Economic hardship exists when the
borrower is receiving payment under a federal or state public
assistance program or is working full time and is earning a total
monthly gross income that does not exceed the greater of: a) the
minimum wage or b) the poverty line for a family of two, as
determined in Section 673(2) of the Community Service Block
Grant Act.

The borrower may instead qualify for an economic hardship
deferment based on other criteria. Specifically, the borrower may
qualify if he or she is working full time and has a federal
education debt burden (including any defaulted loan) that is at
least 20% of the borrower’s total monthly gross income. This
income is based on full- or part- time employment and revenue
received from all other sources. The borrower’s income, minus the
education debt burden, must be less than 220% of the total
monthly gross amount associated with minimum-wage-rate work
or associated with earnings equal to 100% of the poverty line for a
family of two.

In addition, a borrower may receive an economic hardship
deferment under FFEL if the borrower has been granted an
economic hardship deferment under either the Federal Direct Loan
Program or the Federal Perkins Loan Program for the same period
of time for which the FFEL economic hardship deferment is
requested.

Other criteria for this deferment are described in section
682.210(s)(6) of the FFEL program regulations.