How Will Graduate and Professional Student PLUS Work?

This post summarizes my opinion as to how the new Graduate PLUS Loan
will work. Please note that I do not speak for the US Department of
Education, so my opinion has no official standing.

Section 8005(c) of the Deficit Reduction Act of 2005 creates the
Graduate and Professional Student PLUS Loan by replacing "parents"
with "a graduate or professional student or the parents" in Sections
428B(a)(1), 428B(b), 428B(c)(2) and 428B(d)(1) of the Higher Education
Act (HEA). These sections define eligibility, limitation based on
COA-Aid, disbursement, and start of repayment, respectively. These are
all the relevant mentions of 'parents' in section 428B of the HEA.

There is, however, a slight glitch, in that the Deficit Reduction Act
did not make a similar substitution for "parent" in section
428(a)(2)(E) of the HEA. This section of the HEA discusses how the
PLUS loan offsets the EFC and does not reduce eligibility for the
subsidized Stafford. Since 428(a)(2)(C)(ii)(III) provides a catch-all
"other ... loan assistance", the Graduate and Professional Student
PLUS might technically be construed as reducing eligibility for the
subsidized Stafford loan. However, 428B(b) states that "Any loan under
this section may be counted as part of the expected family
contribution in the determination of need under this title", which
would mean that it doesn't reduce eligibility for the subsidized
Stafford Loan. So, overall, I think that the Graduate and Professional
Student PLUS Loan does not reduce eligibility for the subsidized
Stafford Loan. I expect that Congress will pass a technical amendment
later this year to clean up the language in 428(a)(2)(E). Likewise,
485(b) exempts PLUS loans from exit counseling, so either the
Department will need to add regulations requiring exit counseling for
Graduate and Professional Student PLUS borrowers (per the authority
granted in 428B(a)(1)(B)), or Congress will need to make an amendment.

So the Graduate and Professional Student PLUS Loan will function very
similar to the Parent PLUS Loan.

The Deficit Reduction Act did not change the name of the loan
program. The heading on section 428B remains "Federal PLUS Loans" and
455(a)(2) refers to the DL version as "Federal Direct PLUS
Loans". Nowhere in the HEA does it spell out that PLUS is an acronym
for "Parent Loan for Undergraduate Students". I expect that the
Department will abandon the spelled out version of the loan name, and
instead refer to the loans as the "Graduate and Professional Student
PLUS Loan" (GPS-PLUS or GP-PLUS) and "Parent PLUS Loan" (P-PLUS). 
Though if they adopt a new name for the Graduate and Professional
Student PLUS Loan, I would suggest GULP (Graduate Unsubsidized Loan Program).

Annual Loan Limit: COA-Aid, as certified by the school (per 428B(b))

Cumulative Loan Limit: None

Impact on Other Loan Limits: Does not affect eligibility for Perkins,
Stafford, or Parent PLUS loans. The language in 425(a)(2) concerning
aggregate limits specifically excludes loans made under section 428B.
Likewise, 428H(d)(3) indicates that Graduate and Professional Student
PLUS Loans will not be counted toward the aggregate Stafford loan
limit. So NSLDS will need to itemize the Graduate and Professional
Student PLUS Loan borrowing separately from the other types of loans
(and also capture capitalized interest on these loans separately).

Interest Rate: Fixed 8.5% (per section 8006(a) of the Deficit Reduction Act)

Multiple Disbursements: Section 427(b)(2) exempts PLUS Loans from the
multiple disbursement rules in 428G. This language was not modified by
the Deficit Reduction Act, so I would expect the current disbursement
rules for Parent PLUS loans to be extended to the Graduate and
Professional Student PLUS loans.

Repayment: Repayment begins 60 days after the loan is fully disbursed,
per 428B(d)(1) and 428(b)(7)(C).

Deferment and Forbearances: As per 428B(d)(1), repayment of principal
is subject to deferrals under sections 427(a)(2)(C) and 428(b)(1)(M).
These include the in-school deferment for pursuing a course of study
at least half-time, a 3 year deferment during which the borrower is
seeking and unable to find full-time employment and a 3 year economic
hardship deferment. Note that the in-school deferments do not apply
to periods when the borrower is serving in a medical internship or
residency. Medical students remain eligible for the economic hardship
deferment during internships and residencies, and have the option of
consolidating the Graduate and Professional PLUS Loans to obtain new
eligibility for deferments, since a new loan resets the clock on
deferments. Interest continues to accrue during periods of deferment
and forbearance.

Capitalization of Interest: During any deferral of principal payments,
interest may either be paid monthly or quarterly, or it may be
capitalized no more frequently than quarterly, per
428B(d)(2). Capitalized interest is not counted as exceeding the
annual loan limit.

Grace Period: There is no grace period on the PLUS loans.

Loan Fees: 4% (3% origination and 1% guarantee). The fee reductions in
the Deficit Reduction Act of 2005 are for Stafford Loans only. The 1%
guarantee fee will become mandatory, but it appears that the voluntary
nature of the origination fees (as per 438(c)(5,7,8)) will remain
unchanged. Lenders will be free to reduce or waive the origination
fees. 

Parity: Direct PLUS has the same terms as Federal PLUS, per 455(a)(1).

Eligibility: Borrower does not have an adverse credit history (defined
in regulations as being 90 days or more delinquent on any debt, or
having a credit report that shows default, 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).
Note that Graduate and Professional Student PLUS loans do not use any
kind of a debt-to-income ratio or FICO score, unlike private education
loans. 

Unsubsidized Interest: Per 428B(d)(3), the Graduate and Professional
Student PLUS loan is an unsubsidized loan.

New Loans During Medical Internships and Residencies: The language in
427(a)(2)(C) prohibits new loans during a medical internship or
residency, but exempts loans originated under 428B or 428C. This means
that medical school students will be able to borrow the Graduate and
Professional PLUS loan during medical internships and residencies. But
practically speaking, the annual loan limit of COA-Aid will prevent
new borrowing unless medical schools restructure student charges in
some fashion. 

Consolidation: Graduate and professional students will be able to
consolidate the Graduate and Professional Student PLUS Loan with 
other loans for which they are the borrower, including Stafford and
Perkins Loans, and also Parent PLUS Loans borrowed to pay for their
children's education. Note that since the consolidation interest rate
formula remains the weighted average rounded up to the nearest 1/8th
of a percent, capped at 8.25%, consolidating a PLUS loan can
potentially reduce the interest rate. An optimal strategy would
involve consolidating PLUS loans separately from other types of loans,
to effectively reduce the PLUS loan interest rate from 8.5% to
8.25%. (This loophole may, however, be closed when Congress considers
the rest of Reauthorization. The original House consolidation proposal
would have indexed the rates on Stafford and PLUS loans
separately. But that consolidation proposal is rendered moot by the
switch to fixed interest rates on the Stafford and PLUS loans.) 

No Additional Unsubsidized Stafford for Graduate & Professional
Student PLUS Denial: The reference to parents in section 428H(d)(2)
was not changed, meaning that graduate and professional students who
are denied a Graduate and Professional Student PLUS Loan will not be
eligible for any additional increases in the Stafford Loan limits,
beyond the $10,000 (increased to $12,000 by the Deficit Reduction Act)
they were already eligible for under 428H(d)(2)(C).

Additional Stafford Loan Limits for High Cost Programs: The trailing
matter in section 428H(d)(2) allows the Department to increase
Stafford Loan limits for "students engaged in specialized training
requiring exceptionally high costs of education". This is the section
that the Department used to increase annual Stafford Loan limits by
$20,000 to $38,500 (and aggregate loan limits to $189,125) for medical
school students. These limits are not affected by the Graduate and
Professional Student PLUS Loans. The annual limit, however, will
increase to $40,500 because of the increase from $10,000 to $12,000 in
the graduate unsubsidized Stafford Loan limit. The cumulative limit
does not change. Of course, the Department could potentially change
the additional annual limits and the cumulative loan limits for
medical school students or students in other high cost training
programs.

Discharges: The existing discharges for PLUS loans, including closed
school, false certification of eligibility, failed refund, death and
disability, all remain true of the Graduate and Professional Student
PLUS loans.

School as Lender: The Deficit Reduction Act eliminates the ability of
School as Lender schools to originate PLUS and Consolidation Loans. So
such schools will have to refer the graduate and professional students
to other lenders for the Graduate and Professional Student PLUS Loans,
just as they have to refer undergraduate students to other lenders for
the Stafford Loans.