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Parent PLUS loans: Digging out of debt

Shelly  Gigante

Posted on April 10, 2024

Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
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Explain why taking on loans to help your child pay for college could potentially derail your retirement readiness.

Describe the pros and cons of Parent PLUS loans, including greater repayment flexibility and higher fixed interest rates.

Suggest an action plan for those struggling with their loan payments, which may include changing your repayment plan, refinancing, or possible forgiveness.
 
   

If you’ve borrowed money to help your child pay for college, you’re not alone. A growing number of parents are taking out loans, primarily federal Direct Parent PLUS loans, to absorb some of the financial shock associated with obtaining a postsecondary degree.

That they feel the need to assist is understandable. Tuition and fees at public four-year colleges in the U.S. have been climbing faster than the rate of inflation for the last two decades.1

Today, the average annual cost of tuition and fees at a public four-year college is roughly $11,260, while out-of-state residents pay an average annual $29,150, according to the College Board. The published price of attending a private, nonprofit four-year college averages $41,540 per year. That’s before scholarships, grants, financial aid, and tax benefits are taken into account.

But not all parents who take on student loans to help their children cover the bill, or agree to co-sign for their debt, can afford to do so — especially older parents who are approaching retirement.

“I had a client who was over age 65 and couldn’t retire because she and her husband took out a PLUS loan for their daughter’s master’s degree,” said Melissa Brennan, a financial professional with ARS Private Wealth in Plano, Texas, in an interview. “Because of the limited job opportunities in her field, their daughter wasn’t able to find a job locally and couldn’t afford to relocate. Her mother had to delay retirement by two years, stuck in a job that made her miserable and was detrimental to her health, to get the PLUS loan paid off before retirement.”

Additionally, the opportunity cost of not being able to deploy those loan repayment dollars in more retirement-friendly ways is forcing some of her clients to live a significantly diminished lifestyle in retirement, Brennan added.

Note that following the COVID-19 outbreak, payments and interest on all federal student loans (including Parent PLUS loans) were temporarily suspended under the relief program outlined in the CARES Act. The payment pause was extended eight times, but that came to an end in October 2023 when the Department of Education resumed collecting federal student loan payments. Interest fees began accumulating sooner — on Sept. 1, 2023.

The White House gave borrowers the chance to enroll in a 12-month "onramp repayment program," during which time any borrowers who fall behind on payments will not be reported to credit agencies, placed in default, or referred to debt collection agencies.

It also announced a new income-based repayment plan called Saving on a Valuable Education (SAVE) that may cut some borrowers’ previous payments in half and qualify many others for a monthly payment of zero. Parts of the SAVE plan will not take effect until July 2024.

Arguments about student loan forgiveness programs continue at the top levels of government. 

Student loan debt rising among older parents

According to New America, which analyzed data from the major credit bureaus and the Federal Reserve Bank of New York, roughly 3.5 million Americans age 60 and older have student loans, a six-fold increase since 2004. Collectively, they carry roughly $125 billion in student loan debt, a roughly 19-fold increase since 2004. 2

Many either took out a Parent PLUS loan directly to help their child pay for college or co-signed for their child’s student loan. That means they’re on the hook for that debt obligation if their child is unable to pay. (Related: Why parents and professionals owe more on student loans)

With more parents borrowing in a higher interest rate environment, it’s perhaps not surprising that some are falling behind on their student loan obligations.

If you find yourself struggling to pay off a Parent PLUS loan, at any age, the following tips may help you dig your way out of debt.

About Parent PLUS Loans

First, some background. A Parent PLUS loan is a type of Direct PLUS federal loan available through the U.S. Department of Education made directly to parents (or grandparents if they are the child’s legal guardians) of a dependent undergraduate student to help pay for the cost of college or career school. (Learn more: A primer on student aid and loans)

Such loans have one of the highest fixed interest rates of all types of federal student debt – 8.05 percent for loans first disbursed on or after July 1, 2023 and before July 1, 2024. Be aware, too, that the consequences of default can be severe. The federal government can potentially garnish your wages and Social Security benefits.

But Parent PLUS loans do offer more flexible repayment options than most private loans, which can help borrowers better manage their debt obligation.3

The maximum Direct PLUS loan amount parents can borrow is the cost of attendance at the school their child will attend, minus any other financial assistance their child receives. There is no limit to how much parents may borrow, regardless of household income.

But that doesn’t mean parents should borrow recklessly, said Brennan.

“Because of the increasing cost of attendance, I’m not in favor of parents borrowing for college,” she said. “Many parents get attached to the idea of providing the ideal four-year experience for their child and don’t set appropriate cost boundaries for selecting a school. Unless the family determines that a college is affordable, it shouldn’t make the list.”

Alternatively, she said, families can consider a compromise. Perhaps the child starts off at a community college and then transfers to their dream school a year or two later. (Learn more: 6 ways to cut college costs in half)

For borrowers, it’s important to note that Parent PLUS loans are not subsidized, meaning that the interest charged begins to accrue immediately even if the loan is in deferment. If you request deferment, you will not need to make payments while your child is enrolled at least half-time and for an additional six months after your child graduates, leaves school, or drops below half-time enrollment.

Contact your loan servicer

If you are having trouble making your scheduled loan payments, the government urges you to contact your loan servicer immediately, who can help you explore your options for keeping your loan in good standing. The government assigns companies to help borrowers handle the billing and services on their federal student loans, at no cost to the borrower.

Choose a different payment plan

Depending on your financial situation, you may be able to change your repayment plan to pay your loan off faster. If your budget allows, consider applying any year-end bonuses or annual raises toward your student loan to pay it off as quickly as possible.

If your payments are too high, on the other hand, you can potentially stretch out the payments longer to lower your monthly payment.

There are three types of federal student loan repayment plans, each with their own financial implications:

  • The Standard Repayment Plan, which typically comes with a maximum 10-year term, saves you the most interest over time because you pay the loan off faster through slightly higher payments.
  • The Graduated Repayment Plan, in which payments slowly increase over the life of the loan, is ideal for borrowers who have low income today, but expect their income to increase steadily over time.
  • The Extended Repayment Plan offers the lowest monthly payments over a longer period of time (up to 25 years), which may make it easier to fit the payments into your budget, but also equates to higher interest costs.

Refinancing

If you have good credit and enough household income to qualify, you may also be able to refinance your Parent PLUS loan to a lower interest rate through a private lender, which can potentially save you money.

Indeed, refinancing your student loans can reduce the total interest you pay over time, lower your monthly payment or help you get out of debt faster, or some combination of the three depending on the provider and the terms.

It may also be possible to refinance the loan through a private lender in your child’s name so the debt becomes their responsibility.

Consolidate

If you’re struggling to pay for your federal student loans, including a Parent PLUS loan, it may help to consolidate (even if you only have one loan) into a Direct Consolidation Loan to stretch out your repayment term. That can result in lower monthly payments, but here again, you’ll pay more in the long run in interest fees.

Perhaps the biggest benefit of loan consolidation, however, is that by switching to a Direct Consolidation Loan you also become eligible for full or partial loan forgiveness through the income-based payment plan program available through the U.S. Department of Education.

If you qualify, the Income-Contingent Repayment (ICR) plan caps your monthly payments at the lesser of either: 20 percent of your discretionary income, or at the amount you would pay on a hypothetical repayment plan with a fixed 12-year payment, adjusted according to your income. The repayment period is then stretched out over 25 years. Any remaining loan balance after that time is forgiven.6

To be clear, the PLUS loans made to parents cannot be repaid directly under the ICR plan. Parent borrowers must consolidate their PLUS Loans into a Direct Consolidation Loan first, and then repay the new consolidation loan under the ICR plan.

Loan forgiveness

While less common, in the case of financial hardship, you could request a deferment or forbearance that allows you to temporarily stop or reduce your monthly payments.

Borrowers with a Parent PLUS loan who consolidate to a Direct Consolidation Loan may also be eligible for the Public Service Loan Forgiveness Program (PSLF) for public servants.

The program is designed to lighten the financial burden for borrowers who pursue lower-paying jobs, like those common in the public service sector. PSLF forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under an approved repayment plan while working full-time for a qualified employer. If your income is low enough, your payments could be as low as $0 per month, according to the government.

It’s not an outcome anyone wants, but it’s also worth noting that federal student loans are discharged or canceled if you (the borrower) die, become totally and permanently disabled, if your loan is discharged in bankruptcy, or if the child for whom you borrowed passes away before the balance is paid. Private student loans may be a different matter, depending on the terms of the specific loan. (Learn more: What happens to your student loans when you die)

Conclusion

Parents who take on student debt to help their children pay for college mean well, but some get in over their heads — a particular problem for older Americans who are nearing retirement.

If your Parent PLUS loan is jeopardizing your financial security, there are steps you can take to make your payments more manageable. You just need to know where to look.

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This article was originally published in April 2020. It has been updated.

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College Board, “Trends in College Pricing and Students Aid 2023.”

New America, “Why Do So Many Older Americans Owe Student Loans?” May 31, 2023.

Federal Student Aid, “Interest Rates and Fees for Federal Student Loans.”

Federal Student Aid, “The Saving on a Valuable Education (SAVE) Plan Offers Lower Monthly Loan Payments,” 2024.

 

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