Q: I am considering a Graduate PLUS Loan to help cover some of my college expenses, more as a back up in case I am short on money some months. Are there any prepayment penalties associated with the Graduate PLUS loan? In the case that I do not need to use the Graduate PLUS loan that I take out, could I just pay back all of the money in full without having extra charges or prepayment penalties?
A: The Graduate PLUS Loan, or Grad PLUS loan, is a low interest student loan offered directly from the U.S. Department of Education to help graduate students pay for their educational expenses. There are no prepayment penalties associated with a Grad PLUS loan. Borrowers may prepay a portion of their total loan amount, or they may pay their full Grad PLUS loan amount without having any prepayment penalties enforced.
It is important for borrowers to keep in mind, that while the interest rate on a Grad PLUS loan is fixed, the interest will start accruing on the loan at the time of disbursement (borrowers can defer payments until after graduation if they are enrolled at least part time). Borrowers will have the option to pay this accrued interest quarterly while they are in school, or they may have the interest capitalized and added to the loan amount when repayment is entered. If you take out a Grad PLUS loan and do not need to utilize all or any of the funds, you can pay the money back without any prepayment penalties, however, interest will have accrued on your Grad PLUS loan, so you will owe back more than the amount you borrowed. If you think that you can cover all of your educatioal expenses without utilizing a Grad PLUS loan, that would be your best option, as taking out a Grad PLUS loan to have as a back-up plan will essentially not be free of charge.