Parent PLUS loans: Digging out of debt

Shelly Gigante

By Shelly Gigante
Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
Posted on Apr 27, 2020

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, fees, and room and board for in-state residents at a public four-year college is roughly $21,950, while out-of-state residents pay an average annual $38,330, according to the College Board. The published price of attending a private, nonprofit four-year college averages $49,870 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.

Student loan debt rising among older parents

According to the most recent data available from the Consumer Financial Protection Bureau (CFPB), the majority of student loan borrowers are young adults between the ages of 18 and 39. But a growing percentage of borrowers are parents, who either take out a Parent PLUS loan directly to help their child pay for college or co-sign for their child’s student loan. That means they’re on the hook for that debt obligation if their child is unable to pay.2

Surprisingly, the data reveal that Americans age 60 and older represented the fastest-growing age segment of the student loan market between 2005 and 2015. And the number of generally older student loan borrowers quadrupled to 2.8 million in 2017 from 700,000 in 2005.3,4

And as the borrowing rises, so does the number of people struggling to meet loan commitments.

“Older borrowers with delinquent or defaulted student loans may face unique financial challenges as they age,” the CFPB report found. “Complaints submitted by older student loan borrowers to the CFPB illustrate that some consumers who are delinquent or in default on their loans experience problems with servicers and debt collectors that exacerbate their financial distress.”

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. (Related: A primer on student aid and loans)

Such loans have one of the highest fixed interest rates of all types of federal student debt – 7.08 percent for the 2019-20 school year. 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.5

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. (Check out refinancing options with MassMutual partner CommonBond)

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 a 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 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. (Related: 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.

Discover more from MassMutual…

Paying off student loan debt: 5 tips

Seeking relief when student loans are unaffordable

Need financial advice? Contact us

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College Board, “Average published charges, 2018-19 and 2019-20. Table 1: Average Tuition and Fees and Room and Board in Current Dollars, 2018-19 and 2019-20,” 2019.

Consumer Financial Protection Bureau, “Snapshot of older consumers and student loan debt,” 2017.

Federal Reserve Bank of New York, “2016 Student Loan Update,” 2016.

Consumer Financial Protection Bureau, “Snapshot of older consumers and student loan debt,” 2017.

Federal Student Aid, “Understand how interest is calculated and what fees are associated with your federal student loan,” 2019.

U.S. Department of Education, studentaid.gov, “Income-Driven Repayment Plans.”

The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.