Parent PLUS borrowers often struggle to manage not only the parent loan PLUS while trying to save for retirement, but they may still be trying to pay off their own student loans. If you consider that these loans qualify for limited access to income-based repayment plans, no debt-income component to their eligibility, and no loan limit, you have a recipe for financial disaster for some families.
As award letters start coming and your family thinking about how to close the financial aid tuition gap, understand that while Parent PLUS Loans can be a smart option for some families, like all debt in the home. consumption, use them with caution and thoughtfulness.
For many families, reviewing the school’s award letter, which explains what grants, loans, scholarships, and other aids the student is entitled to, can be an overwhelming experience, especially if that particular student is the first to attend university in the family. While it makes sense to first accept “free” money from grants, scholarships and work-study programs, then to consider loans, it is not always easy to tell the difference.
Parents can be caught off guard when they start receiving bills for PLUS parent loans, when these loans are listed next to grants and bursaries – leading less experienced families to assume that a PLUS loan is just fine. is just another kind of grant that doesn’t have to be repaid.
Just because you’re approved doesn’t mean you can afford it
Many families also assume that because there is a credit check requirement to receive a Parent PLUS loan, if they are approved, they must be able to pay the payments. Not necessarily.
Only someone with big enough hits to their credit will be turned down in the first place. This means that a family that has an estimated family contribution, the amount that your free application for federal student aid has calculated that the family can afford to pay, from zero, can also be approved for tens of thousands of dollars. in Parent PLUS loans.
If you are trying to determine if your household budget can handle Parent PLUS payments, a good rule of thumb is to assume about $ 120 per month for every $ 10,000 borrowed. Multiply that by the number of years the degree should take and the number of children expected to pursue a college education. If you only borrow $ 10,000 per year and have two children who pursue a bachelor’s degree in four years, you can expect a payment of almost $ 1,000 per month for the next 10 years.
Parent PLUS loans cannot be transferred to the student
Often, families make an agreement with the student in which the parent agrees to take out the PLUS loan to fill the tuition gap, but the student agrees to pay it back.
The problem is that these loans will always be on behalf of the parents. The only way to transfer them is through a personal and, in rare cases, private student loan consolidation. This is generally not a good idea for several reasons – first and foremost, taking the loan out of the federal program means losing all federal protections and relief options. This includes release options, lower payment options, utility loan forgiveness, and postponements.
A recent graduate will also likely need a co-signer to be approved for a personal or private loan – and often parents are the only option for that. Co-signing makes the parent responsible for the debt as well, so now you still have the financial responsibility – but none of the alternatives a federal loan offers.
And under the Parent PLUS program, any lower payment, discount, or deferral option will be based exclusively on the borrowing parent’s circumstances – even if the student is making the payments.
Having said that, choose one private loan on behalf of the student is not always a good alternative. Not only are private loans less generous in terms and options for relief, there must almost always be a co-signer. As a co-signer, the debt will affect the debt-to-income ratio of your credit report in the same way as if you were the borrower of a PLUS parent loan.
There are lower payment and discount options for Parent PLUS loans.
Fortunately, there are lower payment options for PLUS parent borrowers. Consolidation, phased repayment and extended repayment are all available for these loans. While not eligible for the revised Income-Based or Pay as You Ear repayment plans, Parent PLUS loans which are consolidated under the federal direct loan program may become eligible for the income-based reimbursement option.
This plan bases the payments on the borrower’s income and family size. After 25 years on this plan, any remaining balance is written off and taxed as income. Parent PLUS borrowers who hold a qualifying job or employer in the public service may qualify for the rebate and be tax-exempt after only 10 years. Eligibility for this program is based on the actual borrowing parent, so if only one parent works in a qualifying job and you think this program could be of benefit to you, make sure the parent is listed as a borrower for PLUS loans. .
Parent PLUS loans can be a great financial tool to fill the tuition fee gap once all other available aids have been used up. As with any other consumer debt, however, it’s important to fully understand the terms and financial impact before making what could be a very large commitment.