Do Parent PLUS Loans Affect Your Credit Score?

How Do Parent PLUS Loans Work?

A parent PLUS loan is a federal student loan that a parent (and sometimes a stepparent) can use to help pay for a dependent child's undergraduate education. You can learn more about the parent PLUS loan program on the U.S. Department of Education's website, but here are a few important basics:

• Before you can apply for a parent PLUS loan, your child must submit the Free Application for Federal Student Aid (FAFSA). The same form is required for your child to apply for federal student loans, along with certain grants and scholarships. A new FAFSA must be submitted ahead of each school year.
• If you meet the eligibility requirements, you can apply for a parent PLUS loan using the online direct PLUS loan application. You can borrow up to the cost of attendance at the school, minus financial aid that your child is already receiving.
• Unlike federal student loans given to undergraduate students, parent PLUS loans require a credit check. This credit check looks for adverse credit history (discussed below), and won't include a review of your credit scores.
• Parent PLUS loans have a disbursement (origination) fee and fixed interest rate. The fee and rate may fluctuate from year to year, but they're the same for all borrowers.
• The loan will go directly to the school to pay for tuition, room and board, fees and other educational expenses. If there are excess funds, you may receive them directly or request that they be sent to your child.
• While the funds help pay for your child's expenses, the parent who takes out the loan is generally solely responsible for repaying the loan.
• By default, your loan payments begin right away. You can request a deferment while your child is in schools and for the six months after they leave, but interest will continue to accrue. You can also choose from several repayment plans.

How Can a Parent PLUS Loan Impact Your Credit Score?

A parent PLUS loan can impact your credit similarly to how other student loans and installment loans, such as an auto and mortgage loan.

Unless the applying parent has an adverse credit history and requires an endorser (similar to a cosigner), the parent PLUS loan will be issued to one parent and only reported to the credit bureaus under that parent's name. Both parents can take out separate parent PLUS loans, but the total loan amount can't exceed the borrowing limit for the year.

When you apply, the associated credit check can lead to a hard inquiry, which may temporarily hurt your credit by a few points, if at all. Additionally, you'll have a new account on your credit report and a new loan that's balance is equal to the original loan amount. These factors are included in the models many credit score calculations use and have the potential to lower your credit scores.

As you make your loan payments on time, however, the new on-time payments can help you build credit. Conversely, missing student loan payments can hurt your credit.

Remember, the parent who takes out the loan is solely responsible for making the loan payments. Some parents make an informal agreement that their child will repay the loan, but a missed payment will still only be reported to the credit bureaus under the borrower's name.

If you think you may have trouble affording a parent PLUS loan payment, reach out to your loan servicer right away. You may be able to temporarily pause your payments or switch to a different repayment plan. If you consolidate your parent PLUS loan with a Direct Consolidation Loan, you can even use the income-contingent repayment plan, which bases your payment amount on your income.

What Credit Score Do You Need to Get a Parent PLUS Loan?

The parent PLUS loan credit check doesn't include a credit score check, so there's no minimum credit score requirement. However, the borrower can't have an adverse credit history, which is defined as:

• Having over $2,085 in combined debt on your credit report that's 90 or more days past due, or that was sent to collections or charged off within the past two years.
• Having experienced one or more of the following in the past five years: Debts discharged through filing bankruptcy, foreclosure, repossession, tax lien, wage garnishment or had a federal student loan go into default or be written-off.

If you have an adverse credit history and your loan request is denied, you can appeal the decision if there were extenuating circumstances that led to the adverse credit. For example, you've paid off accounts that were previously in collections.

Alternatively, you may be able to qualify for a parent PLUS loan with an endorser who doesn't have an adverse credit history, as long as it's not the child using the money for school. In either situation, you'll also need to complete a credit counseling course to take out the loan.

If you applied and can't qualify for a parent PLUS loan, your child may be eligible for additional unsubsidized federal student loans. In some cases, this may be preferred as the undergraduate loans have a lower interest rate and origination fee than parent PLUS loans. But it also means your child will be responsible for the entire loan amount.

Consider All Your Funding Options

The lack of a credit score requirement and guaranteed loan amount makes parent PLUS loans a good fit for some parents who want to help pay for a child's college expenses, but it might not be the best option for everyone. For example, sometimes having a child borrow more in federal student loans and then making payments on their behalf may make more sense in your situation. Or, if you have good credit, you may find private student loans offer a better rate than federal parent PLUS loans, but remember that private loans usually don't offer the same types of benefits federal loans do. Additionally, you should encourage your child to apply for scholarships and grants every school year to limit how much both of you might need to borrow.