Imagine the scenario. Your son or daughter has been out of college for over a decade and has moved on to a successful career. Your own career is coming to a close and retirement is only a few years away, and yet, you still owe thousands of dollars for your son or daughter’s college fees. This scenario is a reality for many parents who take out Direct PLUS Loans.
These types of loans—which include both Parent PLUS and Grad PLUS programs— might seem like an ideal way for parents to assist their child with the high cost of education. However, in many cases, these loans are hefty, charge high rates of interest, and put the parent’s finances and retirement at risk.
Types of PLUS Options
PLUS is an acronym for Parent Loan for Undergraduate Students. The Grad PLUS program is designed for graduate students seeking funds to help pay for costs not covered by other financial aid and assistance. There were 1.2 million borrows with $59.6 billion in Grad PLUS loans outstanding in 2018, according to Forbes.
- Direct PLUS student loans are designed to provide borrowing options when seeking to cover college expenses not included with other financial aid.
- There are two types of Direct PLUS loans: Grad PLUS loan and Parent PLUS.
- Parent PLUS loans become a debt burden for the parent, not the student.
- Payments on Parent PLUS loans begin immediately when the funds are provided and do not qualify for the Pay-as-You-Earn program.
- Since qualification for a PLUS loan is based on credit reports and credit history, rather than debt-to-income ratios, some borrowers get in over their heads.
Meanwhile, the Parent PLUS program allows parents to borrow money for dependent students to fund any costs not already covered by the student's financial aid. Parent PLUS loans become the financial responsibility of the parent rather than the student. There were 3.5 million borrows involved in the Parent PLUS program, with a combined $83.7 billion in debt, in 2018.
There Is No Grace Period or Repayment Plans
When a student takes out a loan, he or she is typically granted six months after graduation to start the repayment process. Not so with Direct PLUS loans. The repayment period starts immediately after the child receives the money, which can detract from how much a parent can save for retirement. However, parent borrowers can contact the loan provider to request a deferment while the child is still enrolled half-time and for six months after your child ceases to be enrolled.
There are several plans and programs available to help students who cannot afford their loans. However, Parent PLUS loans are not eligible for most of these plans. Many parents do not realize that their loans will not qualify for Pay-as-You-Earn or the income-based repayment program. A federal student loan granted to a student is also eligible for loan forgiveness programs, forbearance, and in special circumstances, loan cancellation, whereas Direct PLUS loans given to parents are not eligible for all of these assistance programs.
Getting Your Name Off A Cosigned Loan
You Can Borrow More Than You Need
When you apply for a Direct PLUS loan for your child, the lender will scrutinize your credit report, but your income and debt-to-income ratio are not considered. In fact, the lender does not even look to see what other debts you have. The only negative thing lenders look for is adverse credit history.
Once approved for the loan, the school sets the loan amount through its cost of attendance. However, a school’s cost of attendance is always inflated to include living expenses, transportation expenses, and even studying-abroad costs. This can lead to parents borrowing much more than their child needs for college.
Since the borrower’s debt-to-income ratio is not considered, it is possible to secure a loan that you cannot afford. The lender does not base the decision on whether parent borrowers will be able to pay the monthly loan payment on top of a mortgage and other debt. This is why it is very important for borrowers to do their own homework and to know what they can afford before they sign up for one of these loans.
The Consequences of Default
Letting your PLUS loan go into default is a huge mistake. There is no escaping the Direct PLUS loan. Even bankruptcy will not dismiss the debt. Furthermore, defaulting on the loan will increase the risk of government collection consequences, including wage garnishment, Social Security offsets, and tax refund offsets. The worst part is that there are no time limits for when the government can collect the debt. Before you default, contact your lender and ask to speak to a knowledgeable representative. Another solution is to contact an attorney who specializes in student loan debt.
Solutions for Direct PLUS Borrowers
If you took out a Direct PLUS loan for your child's education and are struggling to pay it back, consolidation and refinance loans are available. In fact, even if you are not struggling to pay back your loan, it is a good idea to research PLUS refinancing to secure a lower interest rate and monthly payment.
Borrowers can even extend the loan-repayment length up to 25 years, which will also reduce the monthly payment amount, which can help you stay afloat financially when you are on a limited income. Be aware, though, that while increasing the life of your loan will decrease your monthly payment, it will also increase the total amount paid for the loan.
The smartest financial move would be to pay off the student loans as soon as possible and not take them into retirement with you. Pay as much as you can towards the loan while you can still make money, even if it means you have to tighten up your budget.
Do not borrow against your retirement fund or cash out your retirement plan early to cover the loan costs. Instead, if you are nearing the age of 65, consider working a few more years to pay off the loan before retirement.
The Bottom Line
Many times, a school will present the student's financial aid package with a Direct PLUS loan added in. The school might claim that it wants to make families aware of all of the available funding options, but including the Direct PLUS loan in the financial package can make the true cost of college confusing. When considering the costs of college, ask for the financial aid package breakdown without the PLUS loan.
Signing up for a PLUS loan you cannot afford can ruin your current and future sound financial standing, so do a lot of research before signing up for this type of loan.
Instead of a Direct PLUS loan, you might have your child opt for a private student loan for any leftover costs that financial aid and federal student loans do not cover. If you want to help your child financially, you can make payments on the loan while he or she is still in school. This allows you to help foot your child’s college costs, but it does not hold you accountable for the expenses.
Helping your child to shoulder the cost of college is a noble thing to do, but not if it puts you in a difficult spot financially or puts your retirement at risk. Ultimately, your child will have several decades to pay off a loan before retirement and—unlike Parent PLUS loans—may also become eligible for loan forgiveness programs and income-based payment plans.