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How PLUS Loans Work

Terms of a PLUS Loan
Make sure you know the terms of your PLUS loan before you sign your name on the dotted line.
Francesca Cambi/Getty Images

If you qualify for a PLUS Loan, the funds will be paid out to the school in two installments. The checks are usually sent directly to the school, but some schools require the parent to endorse them first.

There are rules about how PLUS Loan funds can be used. First, the money is used to pay your remaining tuition, room and board, fees and miscellaneous educational expenses. If any money is left over, it's given back to the parent, who must also use it to cover educational expenses. If the parent chooses, he or she can release the money to the student or hold the extra funds in a school account.

The fixed interest rate for all Direct PLUS Loans is 7.9 percent for and the rate for FFEL PLUS Loans is 8.5 percent. Unlike subsidized federal loans, interest starts accruing the minute the funds are released. However, you don't have to start repaying the loan immediately. You can wait until 60 days after the full amount of the loan has been disbursed; or wait until six months after the student graduates or ceases to be enrolled on a half-time basis [source: Federal Student Aid].

There is also a processing fee associated with each PLUS Loan. Every time the loan is disbursed, the government pulls out four percent to cover its costs. If you receive a FFEL Loan, a portion of that four percent will go to the lender itself.

The specific payment terms for FFEL PLUS Loans vary with each lender, but generally you have 10 years to pay back the loan. To make payments, the parent either sends checks directly to the government (Direct PLUS Loans) or to the private lender who's servicing the loan (FFEL PLUS Loans).

Under certain circumstances, you can apply for deferment or forbearance, which are temporary reprieves from repayment. Under the law, you qualify for deferment if you're unable to find employment or suffer economic hardship (for up to three years). You also qualify if you're enrolled half-time in a college or a graduate fellowship program.

The twist is that you still accrue interest on your loan even if you're not paying it back. Even worse, during deferment the interest is capitalized, or added onto the principal of the loan, increasing the total loan amount [source: Federal Student Aid].

Forbearance is another temporary reprieve. A lender can grant forbearance for any number of reasons, although the borrower will need to provide written proof -- medical bills, unemployment records or death certificates -- to back up those claims. Each period of forbearance can last no longer than 12 months at a time for a total of three years. Like a deferment, interest also continues to add up.

For more information on financial aid, take a look at the links on the next page.