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How a Parent PLUS Loan Can Destroy Your Life
Parent Plus Loans are fueling the college tuition run up. These easy-to-get credit lines can also lead you into bankruptcy.
Someone I love has confided in me that she intends to take out a Parent PLUS loan to finance her son's college education.
I'm hoping she doesn't. This wonderful person, bless her soul, has never been able to handle money well. Once again, she is greatly overextended.
A Parent PLUS loan is the last thing she needs right now. Actually, it's probably the last thing anyone needs.
These loans are issued by the federal government. They are designed to help families pay the difference between a student's financial aid package and the actual cost of an education.
Often, there's a gap in what the school expects a family to pay and what it can actually afford.
Parent loans are a great deal for the college, because it ensures tuition will be met. Many observers believe these loans are one of factors behind the ever-soaring cost of higher education. If parents can, somehow, come up with the money, there's little incentive to rein in costs.
Taking on this Debt May be Devastating
Parent PLUS loans, however, have the potential to financially ruin parents, just as they are getting ready to retire.
Interest rates on these loans are high - currently at 6.41 percent. You'll also be charged a 4.2 percent fee of the total, when the loan is processed.
Many consumer advocates have sounded the alarm that the barrier for entry is way too low, and that these loans are being given to people who won't be able to pay them back. There is a widely publicized story of a mother in Texas taking on $41,000 in Parent PLUS debt, when her annual income was only $50,000.
Sometimes these loans are even given to people with a shaky credit history.
How Much Can You Borrow?
One of the complaints is that there's no limit on what you can borrow, as long as it's used to pay for education. The may be as much as the difference between a financial aid package and the cost to attend a particular school. loan amount
Here's one scenario: Tuition, room and board at a certain university is $50,000 a year. The student receives a $15,000 annual scholarship and $5,500 in federal student loans, bringing the out-of-pocket costs down to $29,500.
The parents have managed to put away $40,000 in a special education fund, and they have budgeted $10,000 a year for four years. But this isn't nearly enough.
Unless these parents have other money available, or can pay approximately $19,500 a year to meet the tuition, they'll need to find at least another $78,000 to cover four years of tuition, provided their child graduates on time. This is also a very conservative estimate, as tuition continues to rise.
At this point, a Parent PLUS loan may look very attractive.
Do You Believe Parent Plus Loans Are Risky
A Parent PLUS Loan Never Goes Away
Parenthood is a lifetime job. The same may be said for a Parent PLUS loan. Unlike mortgage and credit card debt, this type of student loan can never be forgiven in a bankruptcy court, if you find yourself unable to repay it.
You may be able to extend the time you need to pay it back. But interest will accumulate in the interim.
If you can't repay these loans, there is the great possibility that your standard of living will suffer. The government has the ability to garnish your wages, as well as your tax returns and your Social Security checks. If you have a professional license, you may not be able to have it renewed if your credit rating is destroyed..
Many parents take these loans out with the understanding that the student will make the payments. But this is a risky proposition because of today's uncertain job market.
When my children were looking at colleges, I foundThe College Solution by Lynn O'Shaughnessy and invaluable source of information.
What are Some Other Options?
Most financial planners recommend having a frank discussion with your children about what you can afford to spend on college. Choosing a less prestigious, less expensive school may be a better bet. A slightly lower-ranking institution may also be more generous with financial aid.
When it comes time to fill out college applications, a student should make sure to apply to one or more safety schools. These colleges are where he or she is likely to be admitted and can also afford to attend.
Spending two years at a community college and then transferring may also be a solution for some families.
Parents with good credit may also be able to take out a home equity loan or a privately funded student loan if it has more favorable rates.
Parent PLUS Loan Facts
- Parent PLUS loans are issued by the federal government.
- Many people report it's remarkably easy to qualify, although tighter restrictions were implemented in 2011.
- Parents now owe a total of at least $45 billion in student loans.
- People over 60 are the fastest-growing category of education loan recipients.
- Parent PLUS loans cannot be forgiven in bankruptcy proceedings.
Parents in Default
About one million families each year take out PLUS loans totaling $10.6 billion. They can choose to repay in a time frame of between 10 to 25 years. Paying it back over a longer period will result in a higher amount over the lifetime of the loan.
Parents have not been as forthcoming about going into default as student borrowers, so we hear little about this problem. But one estimate pegged the parental default rate at 10 percent.
There have even been reports of a suicide with Parent PLUS loans a contributing factor, according to the surviving spouse. Loss of a job, or an unexpected health problem may make it impossible to repay these loans.
One step in the right direction is that federal government made changes to the approval process in 2011, making the loans a little harder to get.
A Bubble About to Pop?
Are Parent Plus Loans All Bad?
No, not at all. They can be a good option if you don't overextend and take on more debt than you can reasonably pay back.
These loans may be the only way someone can obtain a four-year degree, which is necessary in today's job market. A PLUS loan may be the vehicle available for someone whose parents have less than stellar credit history, and don't qualify for a private student loan.
(Private loans, unlike government loans, offer no protection or forgiveness if a student is disabled or dies.)
PLUS may be a very good option during the last year of college, when all other sources of funding are exhausted. You'd hate to have a few thousand dollars stand in the way of graduating.
- The Downside of Parental Plus Loans Is the Interest Rate - WSJ
Financial-aid experts say federal student loans and home-equity lines of credit may be better ways to pay for college.
- How Some Colleges Front Load Financial Aid Offers
Some colleges entice incoming freshman with lucrative financial aid packages, which may not materialize in subsequent years.
- When Parents Can't Afford College
Each spring, countless parents realize they can't afford to send their child to college. That's because many Americans are now priced out of the market.
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