3 Things You Need to Know Before Taking a Parent Plus Loan
No matter how well you plan for college, sometimes borrowing is simply unavoidable – and that’s okay. Typically 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 other avenues available for paying as much as possible of your college expenses with free/aid money, 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. There are a couple of 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 When Awarding It
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 plan for how they are going to manage these payments.
While the payment might look quite manageable the first year, when you have multiple children in college, going to school 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 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 You Don’t Know About
If you do some research on the Parent Plus Loan, you may find some information stating that consolidated Parent Plus Loans may be paid back under the Income Contingency 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 income:
- The part of your income that is equal to the current Federal poverty guideline ($15,000 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.
Okay, so this actually sounds like a good thing, right? These new rules could mean that your payments on the loan could be lower. But hardly anyone knows about these provisions – probably because the government hopes you don’t know the rules, and don’t take advantage of them!
It’s important that you talk to someone who really understands the rules for these loans, before you go out and apply for one.
3. A Parent Plus Loan Can Affect Your Credit Rating
You may be able to take a Parent Plus Loan without really qualifying for it, and while the government doesn’t care about your debt-to-income ratio, other lenders and creditors do, and taking a Parent Plus Loan can still affect your credit rating. If you’re 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 can be challenging, to say the least!
For these reasons, we highly recommend you consult with one of our experienced college planning specialists before taking a Parent Plus Loan to pay for college.
To speak with one of our qualified college planners, contact our helpful staff at 614-536-0246.