It’s no secret that pursuing a college degree can be an expensive endeavor. Most parents are thrilled and proud that their child will be able to benefit professionally and personally from their higher education, and many parents decide to take out PLUS loans to help cover their child’s expenses. But what happens when these payments become too much for the parent to deal with?
How Do PLUS Loans Work?
Parents can borrow up to the full cost of their child’s education, after the student has maxed out their federal loans (no more than $30,000 in subsidized and unsubsidized loans for their entire undergraduate education.) Parents can borrow regardless of their credit history, income, and even whether they have a job or not. The only factors that can disqualify a parent from borrowing is a foreclosure, default, bankruptcy, or loan delinquency of 90 days or more in the last five years.
The amount that may be borrowed is not affected by the number of children in the family, so it can be easy for parents of large families to get in over their heads. Additionally, while a student benefits from their education and can usually look forward to increased income, parents don’t have this same benefit.
The default rate is currently around 5% for PLUS loans, and the way these payments are collected can be devastating to people who are retired or nearing retirement. The government may seize tax returns, wages, and Social Security payments.
Unlike most types of federal loans, PLUS loans have limited repayment plan options, and PLUS loans usually also have a higher interest rate than other types of loans. One option is for parents to “consolidate” their PLUS loans into an Income contingent plan. Payments are set based on discretionary income; for some people this means they do not need to make payments at all. After 25 years, any remaining balance is forgiven, but this is counted as income for federal tax purposes. This could lead to owing taxes, but still usually significantly less than the PLUS loan amount.
Helping the Family
Some graduates whose parents are struggling to keep up with PLUS loan payments feel guilty and obligated to help their parents with these payments, in addition to their own loan payments. While the student is not legally responsible for these payments and there would be no negative consequences if they didn’t make payments, it can be difficult to see your parents working hard to pay for your education or even having their tax returns seized or wages garnished. Some parents may not deal with these loans positively, and instead lay a guilt trip on their child. A student may decide to make these payments on their parents’ behalf just to maintain peace in the relationship. This does nothing to improve the student’s credit score, and they also may not deduct these payments on their taxes, since the debt is in their parents’ names. Making these payments can really limit what the graduate can do as they build their new life; they may need to put off purchasing a home or investing in retirement.
The picture painted here may seem bleak, which is why it’s wise to only borrow what you absolutely need to fund your education. It may be best to spend two years at a community college or consider a state school versus an expensive private university. Pursue all sources of Grants and Scholarships that may be available to you, and consider working while you’re a student to help pay for your education.