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After the financial aid letters have gone out, scholarships have been granted and budgets have been crunched – parents and students may still come up short on college tuition. Enter the Parent PLUS loan. A Federal government backed education loan for parents. Because federal student loans are almost always superior to private student loans, one would think this would hold true for the Parent PLUS loan. It doesn’t.
What is a Parent PLUS Loan?
A Parent PLUS loan is an unsubsidized loan from the federal government that offers parents a way to bridge any gaps in a child’s college tuition. A credit check is run, but there are no income requirements. In fact, a parent can borrow up to the cost of attendance minus any other aid a child is already receiving.
The Issues with a Parent PLUS Loan
Federal student loans come with a lot of benefits, but the same can’t be said for the Parent PLUS Loan.
Unlike federal student loans, the Parent PLUS Loan comes with an origination fee. Loans disbursed on or after October 1, 2014 and before October 1, 2015 carries a fee of 4.292% and loans disbursed on or after October 1, 2015 and before October 1, 2015 carries a fee of 4.272%.
Steep Interest Rate
Parent PLUS Loans first disbursed on or after July 1, 2015 and before July 1, 2016 carry an interest rate of 6.84%. This is more than 2% higher than undergraduate federal student loans, which currently have an interest rate of 4.29%.
Only Eligible for One Income-Based Repayment Plan
Students currently taking out federal student loans will be eligible to utilize the Income-Based Repayment Program, the Pay As You Earn repayment program or the Income-Contingent Repayment Program. The PLUS loan is only eligible for the Income-Contingent Repayment Program (ICR), if consolidated, which is the least affordable of the three options. Parents will first have to consolidate their loan(s) with the Department of Education into a Direct Consolidation loan. Then the loan can be eligible for ICR. This means a monthly payment can be no more than 20% of discretionary income and any remaining balance will be forgiven after 25 years of payments.
Allows Parents to Take on More Debt Then They Can Afford
One of the biggest problems with the Parent PLUS Loan is the ability for parents to take on far more debt then they can actually afford. There is no income check run on Parent PLUS Loans. A credit check does get performed, but even those with weak credit can still obtain a loan with a little help from either an endorser (fancy word for co-signer) or documenting to the Department of Education any extenuating circumstances for the adverse credit history.
A student can only borrow a maximum of $31,000 in Direct federal student loans (subsidized and unsubsidized). There are also limits on Perkins loans and other federally backed options. What if a child goes to a school that costs $50,000 a year for an undergrad degree, $200,000 over 4 years? He can borrow $31,000 in Direct Loans, $27,500 maximum in Perkins Loans (if eligible), but that still leaves $141,5000 remaining.
Perhaps he gets some scholarships from the university and through other sources and that brings the total down to $100,000. Mom and Dad saved some money, but only can offer $20,000. That leaves $80,000 remaining. So Mom and Dad agree to take on a Parent PLUS Loan. Even though Mom and Dad make a combined income of $65,000 a year – they can still take on $80,000 worth of debt at an age where they’re likely closing in on retiremeent.
Can’t Pass On to a Student or Consolidate It With Student’s Federal Loans
Once a Parent PLUS Loan is in a parent’s name it can’t be passed on to a student nor consolidated with a student’s federal loans. A parent can work out a deal with a child to have the child pay the parent directly, but the loan can’t be moved to the child’s name.
Ways to Avoid Parent PLUS Loans
The first step is to have your child max out Federal student loans as well as seek all grants and scholarships for which he or she is eligible.
Next is to consider getting a private loan or co-signing with your child on a private loan.
However, private loans should only be the option if you’re confident in your ability to repay the loan in 5 to 10 years and you have a high credit score. Private lenders offer lower rates than the government is providing on Parent PLUS Loans and some private lenders don’t charge an origination fee. But keep in mind; private lenders are far less forgiving if you hit a rough patch. Even worse, if the child passes away a Federal loan will be forgiven but a private loan won’t be.
How to Handle an Existing Parent Plus Loan
Are you already struggling with a Parent PLUS Loan? Here are three options for getting a handle on your repayment:
You can refinance a Parent PLUS Loan with a variety of private lenders (like SoFi*). You could get a lower interest rate and avoid paying an origination fee to refinance.
Consolidate to make Parent PLUS loan eligible for ICR plan
As mentioned above, Parent PLUS Loans can go through the Income-Contingent Repayment Plan, but first they must be consolidated. The ICR means you won’t have a monthly payment of more than 20% of your discretionary income.
Do you work as a public servant?
Parents are eligible for public loan forgiveness – but it still takes 120 payments (10 years) of on-time payments before forgiveness kicks in.
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