Is the Parent PLUS Loan a Good Idea for You?

It's time to ask yourself

Student loan debt in the U.S. didn’t reach a whopping $1.5 trillion overnight. In the 1950s and 1960s, the U.S. government began backing loans for higher education. This caused colleges throughout the country to raise tuitions and fees to use up every penny that students and their families could borrow. Meanwhile, parents have been sold on the value of higher education to the point where they don’t fully consider college costs. Students and their parents alike sign for loans without having a firm grasp on the return on investment for a college education. Parent PLUS Loans particularly feed on parents’ desire to help their children get a degree. But is the Parent PLUS Loan a good idea for you and your family?

Consider these five things to determine if the Parent PLUS Loan is a good fit for your situation.

1. PLUS Loans are relatively easy to get, but they can be difficult to pay off.

Often, parents who don’t have good credit can qualify for PLUS Loans. Some parents are so happy to qualify that they don’t pay much attention to the terms. For the 2018-19 school year, the interest rate on PLUS loans was 7.6 percent and fees were 4.26 percent. Borrowers must apply for a new loan every year. Increases in interest rates and fees are far from uncommon.

2. Flexible repayment terms are not good for you.

One of the reasons that PLUS loans are popular is that parents don’t have to start repaying right away.  You must remember though that interest is accruing. Loan balances balloon with the help of accrued interest. If the initial repayment amount is difficult to manage, the deferred repayment amount will be impossible.   

3. Loans for college are different from other loans.

A great example of the difference between personal loans and student loans can be found in bankruptcy. If a borrower files for bankruptcy, they can generally have their personal loans discharged. However, student loans are much more difficult to have discharged due to bankruptcy. College debts are generally with borrowers until they’re paid off or the borrower passes away. This applies to parents taking out Parent PLUS Loans as well.

4. Loan forgiveness happens very rarely (especially with Parent PLUS Loans).

Loan forgiveness for Parent PLUS Loans only happens if the student dies or the parent becomes disabled. Also, the government has several ways to collect on an outstanding balance, including wage garnishment, levying tax refunds, or keeping a portion of social security payments.

5. The U.S. Department of Education farms loans out to several loan servicing companies.

Some of those companies aren’t particularly good at what they do, nor are they regulated well. In fact, a recent report from the Department of Education’s independent inspector general has highlighted those shortcomings. Apparently, loan servicer representatives have failed to inform some borrowers of all their repayment options and they’ve miscalculated borrowers’ monthly payments.

How should parents proceed with Parent PLUS Loans?

College students get lower interest rates on Direct Loans than parents get on Parent PLUS Loans. So, it makes more sense for the students to borrow rather than the parents. If a student has received all funding available and is still coming up short, parents might consider helping with a loan. But Parent PLUS Loans aren’t the only option. Parents with good credit might get better rates from private lending institutions.

Lack of awareness about the real value of higher education and about financial aid is costing American families more than ever before. Students and their families need to do their homework when it comes to college and financial aid. From the day you start looking into colleges until the day you pay off all college-related loans, you need to closely examine the information available.

Struggling to pay off your student loans? Help is available for you.

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