3 Things You Should Know Before Taking a Parent Plus Loan
No matter how well you plan for college, sometimes borrowing is simply unavoidable... And that’s okay. Many student loans have very low interest rates, payments and interest are often deferred until the student is out of college, and you have a reasonable amount of time to pay them back.
As long as you and your student strategically plan for this, utilize all avenues available for paying as much of your college expenses as possible with financial aid and college savings, and take on only a small debt load that is easily manageable on a new graduate’s salary, borrowing a bit of money to get a good college degree is not the worst thing you could do.
However, some strategies for borrowing money for college are better than others. One of the most popular and well-known loans that parents often take is the Parent Plus Loan. While this loan is frequently offered to parents, and sometimes it may be your only option to cover your college gap, there are a few drawbacks to this loan that you should definitely be aware of before you apply.
1. The Government Does Not Consider Your Ability to Pay Back the Loan
This is pretty scary when you think about it. If loans are being handed out without any consideration of income, assets, or income-to-debt ratio, this can really put some families in a very tough position, unless they have some help in the form of a financial planner or college planner who can help them make a plan for how they are going to manage these payments.
The payment might look quite manageable the first year. However, when you have multiple children going to college for 4+ years for each child, and you’re taking out a new loan each year, the payments can quickly snowball into a frighteningly high monthly amount, which can end up nearly bankrupting some families.
These loans can also carry origination fees, plus often much higher interest rates than true student loans (loans in the students’ name).
2. The Loan Has Complicated Loopholes That Most Families Don’t Know About
If you do some research on the Parent Plus Loan, you may learn that consolidated Parent Plus Loans may be paid back under the Income Contingent Repayment Program, which would require payments of up to 20% of “discretionary” income, with the balance of the loan forgiven if not completely paid back in 25 years.
What most people don’t know is how “discretionary” income is defined by the government. Especially if you’re nearing retirement, you need to be aware of these provisions. According to EdCentral.org, “discretionary” income is determined by deducting the following items from your gross income:
- The part of your income that is equal to the current Federal poverty guideline ($17,240 for a married couple)
- Untaxed income, such as withdrawals from Roth IRAs, cash value life insurance, untaxed SS benefits, and other accounts on which you have already paid taxes.
- Your AGI may include only the income of the parent who signed for the loan.
However, most parents either aren't aware of or don't understand these rules, and therefore don’t take advantage of them.
It is important that you talk to someone who truly understands the rules for these loans before you go out and apply for one.
3. A Parent Plus Loan Can Affect Your Credit Rating
The problem here is that so many parents are able to take a Parent Plus Loan without really qualifying for it. However, while the government may not care about your debt-to-income ratio, other lenders and creditors do, and taking a Parent Plus Loan can affect your credit rating. If you are nearing retirement and thinking of downsizing to a new home, it’s important to watch your credit rating and your debt levels to make sure that your loan debt won’t negatively impact your retirement goals.
Lastly, remember that the rules can – and do – change often, and each year you are required to apply for a new loan. Keeping up with all the rules and fine print on each loan can be challenging, to say the least!
For these reasons, we highly recommend you consult with an experienced college planning specialist before taking a Parent Plus Loan to pay for college.
To speak with a qualified college planner, fill out our contact form, or call our office at 614-300-9498 to schedule a free strategy session.
General Disclaimer: Information provided on this blog is for educational purposes only and should not be considered financial advice. For guidance on your personal financial situation, you should consult with a qualified financial advisor.