Low-interest federal PLUS loans help parents pay for their children’s college tuition. While taking out the loan will further your children’s education, it may cause trouble for you in the future. Before applying for a PLUS loan, consider:
High-Interest Rates & Fees
The PLUS loan charges a higher interest rate than federal loans available to your student borrower, currently set to 6.84%. This means that you will repay the government more than your child would if he or she took out a federal student loan.
PLUS loans also have a high origination fee, currently set to 4.272% of the loan amount.
Parents PLUS loans by the school’s cost of attendance, not tuition. The cost of attendance typically includes everything from books to living on campus.
Borrowing More Than You Can Afford
PLUS loans have looser restrictions than student loans, which means many families get roped into taking on more debt than they could ever realistically repay.
Unlike other lenders, getting a PLUS loan only requires a basic credit check. A basic credit check doesn’t include income determination or employment status. It only considers your credit-worthiness. There’s no underwriting to determine if you have the ability to repay or income to sustain payments.
The Department of Education doesn’t keep track of how many parents go into default because of taking out too much money. It’s estimated that approximately 9.4% of PLUS borrowers who acquired their loans in 2011 will default within 20 years. The rate is higher than the projected rate of students who borrowed federal loans the same year.
Parents Who Fail to Repay Many Lose Retirement Funds
The government is serious about getting its money back. The parent loan is almost impossible to discharge in any bankruptcy chapter. If you default on the loan, the government has the option to garnish wages, seize tax refunds or take Social Security payments.
No Forbearance or Deferment
A deferment or forbearance allows student borrowers to delay making payments if they have financial trouble. Parents aren’t given those options unless specific circumstances exist. The government offers few income-based payment options. It doesn’t offer any loan forgiveness options either.
The Timing is Poor
The point of student loans is to help students pay for college. The payoff for students borrowing money now is a higher income to afford repayment later.
While student loans are not ideal, most students will see a benefit to those loans and be able to pay them off in a reasonable time. Parents are not likely to see their incomes increase steadily at the same rate as those of their kids. They should be focused on saving up for retirement and paying off any other debt rather than taking on new debt just when their income potential may start to decline.
Alternatives
A PLUS loan is just one option. Some parents may actually see better rates by looking at private lenders, especially if they have a good credit history.
If you can’t afford a loan, look for other alternatives. For example, make a tuition payment plan with the school. Many plans range from interest-free to a small fee.
Of course, the best option is for your student to go to a school which is affordable for your family. Investigate tools like Cost Cutter to help you compare college costs and financial aid packages in order to choose a school that your child can actually afford.
No parent should go into six-figure debt to a standard education. Higher education must always be an investment with a high return, not high debt.
Sources:
- http://time.com/money/3990585/plus-loan-parents-college-debt/
- http://www.usnews.com/education/blogs/student-loan-ranger/2014/08/20/parents-think-hard-before-borrowing-for-with-your-student
- http://chronicle.com/article/The-Parent-Plus-Trap/134844
- http://www.eoionline.org/blog/the-problem-with-parent-plus-loans/
