Parent Plus Loans: Borrower Beware

university signSavvy consumers will want to look carefully at student loan options and make sure they understand the long term obligations they are undertaking. Millions of parents are getting in over their heads with Parent Plus debt. These loans can be appealing to parents who want to support their child’s college dreams without saddling the student with excess debt. Unfortunately, Parent Plus loans can be the road to financial disaster. With high credit limits, bad interest rates and unforgiving repayment terms, consider Parent Plus loans with caution.

What are Parent Plus Loans?
The Parent Plus loan program is run by the federal government. These loans are offered to parents after their student has maxed out the amount of regular student loans they can take each year. It is the parents, not the students who are taking on the responsibility for paying back Parent Plus loans.  Families sometimes assume kids will take on the debt and then later those agreements fall apart. These loans lack some of the desirable features of other regular student loans. The interest is high and the repayment terms are not as flexible. They offer very high limits so they allow families to get into excessive debt.

Problem One: No Consideration of Ability to Pay it Back
The screening process for the Parent Plus loan doesn’t include an in-depth review of your income or your financial commitments. The process is only 20 minutes long and mainly considers negative credit history. If you’ve failed to pay bills in the past, it can disqualify you for the loan. But having high expenses versus income  (big mortgage, health expenses, etc.) it is unlikely to stop you from being approved.

Problem Two: Very High Amounts of Borrowing Allowed
Parent Plus loans are offered in the amount of the full Cost of Attendance. The Cost of Attendance is determined by the college and it includes tuition, fees, room, board, books, etc.  If the college has a Cost of Attendance of $50,000 a year and the student is receiving $10,000 in grants and other student loans the parents are eligible to borrow the entire remaining $40,000 balance for just one year.

PiggybankProblem Three: Interest Rate
Parent Plus loans currently have an interest rate of around 5.5% and a loan origination fee of around 4% which ends up making the interest rate closer to 9%. Undergraduate Stafford Loans offer a much better interest rate than Parent Plus Loans.

Problem Four: No Desirable Repayment Terms
Student loan debt cannot be discharged during bankruptcy. Parent Plus loans also lack some of the desirable features offered on regular (Stafford) student loans. These features include: deferments for medical disability or graduate school attendance, income-based repayment, and the possibility of loan forgiveness for public employees. While students just leaving school may hope their wages will continue to increase as gain seniority and experience, parent borrowers are often later in their careers when their wages are more stagnate.

Problem Five: Don’t Mess with the Feds
There can be many reasons why families may struggle to repay Parent Plus loans. Illness, disability, job loss, and bankruptcy do not change your obligation. As a lender, the federal government has powers that private companies do not. If you fall behind in paying your debt they can withhold tax returns and garnish a portion of wages and even Social Security payments.

What to Do Instead
It is rarely a good idea to look at Parent Plus loans as a primary way to pay for college. But there are ways to avoid having to take out excess loans.

Apply to Affordable Colleges
Do not develop a college list independent of cost considerations. Yes, as parents we want to make our kids’ dreams come true. But no child’s dream should be on the back of their parents being buried under debt and being unable to ever retire. These are tough conversations to have with our kids, but they are crucial. Make sure your student is applying to financial safeties – schools where they are likely to be admitted and to be able to afford to attend. Before you commit to taking on student loan debt use debt calculators and look at the full cost for four years (or more depending on the degree). Teens often don’t understand debt well but looking at monthly payments will help.

Don’t just go for the brand name – look with your eyes open at a wide range of possibilities. Consider a wide variety of options, including regional state universities, community colleges and private schools where your student is a likely candidate for merit aid. Try earning credits through CLEP or AP if your college offers it. If you are student is a senior and no colleges they’ve applied to are affordable it is a good idea to take a gap year or look more at community college.

Maximize Stafford Loans First
While parents are kind to want to spare their children taking on student loan debt, they should not see Parent Plus loans as an alternative. It is a better plan to let your kids borrow on the student loans that offer better repayment terms. You can help by making interest payments on unsubsidized loans while they are in college and do what you can to help pay down the balance after they graduate.

Look at Other Financing Options
If you have assets and a good income, work with a financial planner to look at more desirable options than Parent Plus loans. That may include lifestyle changes, moving assets, refinancing your house, or a loan with better interest and repayment terms.

Already in Over Your Head? Consider a Transfer
$50,000 in debt for the first year at NYU? Making that debt $200,000 by the time you graduate isn’t going to make it better. Look hard at the public university options in your state and try to bail out before it gets worse.

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