College students take out loans as an investment: presumably, they will graduate and receive a benefit – income to help them pay off that debt, and then some more.
But parents borrow for their children without promising higher incomes. And by law they are on the hook.
Getting federal PLUS loans for parents is easy: colleges often list them along with grants and undergraduate loans in financial aid letters. They lack the traditional underwriting requirements for credit history and income. There is also no limit on the total amount of the parent loan.
These factors make it easy for parents to borrow more than they can afford.
“I feel like parents are more pressured to take on overwhelming debt when it comes to college than ever before,” says Betsy Mayotte, president and founder of the Institute of Student Loan Advisers.
Parent PLUS Credits also offer less options for managing payments and are more difficult to navigate.
“Access to all of these things is not insurmountable, but when you have it all, there are many hurdles for parents to overcome to get relief,” says Rachel Fishman, deputy director of research for the Education Policy Program. at New America, a non-partisan think tank.
This is why PLUS parent loans can grow rapidly and how struggling parent borrowers can cut repayments and seek forgiveness.
Why Parent Loans PLUS Create Repayment Problems
Parent PLUS loans were originally intended to help middle- to high-income parents who had no cash but had assets, says Christine Blagg, senior fellow at the Center for Education Data and Policy at the Urban Institute. , a non-profit research organization. But over time, the target borrower for these loans shifted towards middle and low income families.
“The logic of ‘okay, you have assets that you can lean on to pay off this debt’ is falling apart for low-income families,” says Blagg.
Parent PLUS loans are also the most expensive type of federal loans: they currently carry an interest rate of 6.28% for the 2021-22 academic year, compared to 3.73% for undergraduate loans. And they carry a higher initiation fee – currently 4.228%. Parents who meet traditional income and credit standards can obtain private student loans at much lower rates with zero creation fees – but parents with low income or questionable credit cannot.
Over the past seven years, PLUS parent loan debt has grown from $ 62.2 billion to $ 103.6 billion, up 67% from a 39% increase in loans to undergraduate students.
While there is little information about default interest rates among parent borrowers, both Mayotte and Fishman say there is enough anecdotal evidence to show that some borrowers are struggling to pay off these loans.
Also in MarketWatch: American Colleges Facing $ 130 Billion Crisis
Legislators, student debtors and activists have consistently pressured Washington to cancel a loan of up to $ 50,000, but there is no specific proposal in Congress and no guarantee that PLUS loans will be included.
Current Opportunities for Parent Borrowers
Here are the options available to parents now:
Seek forgiveness for income-based payments. Income-based repayment is a safety net for all federal student loan borrowers, but parent PLUS holders can only access the most expensive of the four plans: income-dependent repayment, or ICR. This limits payments to 20% of your discretionary income and lasts 25 years.
The ICR is especially useful for older parents who, after retirement, can expect to receive less income than they did when they borrowed. After 25 years of repayment, the parent borrowers will be forgiven the rest of their debt.
The right to forgiveness of a government service loan. A public service loan forgiveness provides an opportunity for a forgiveness after 120 payments while a parent works for an eligible nonprofit or government employer.
However, such a cancellation is difficult to achieve: analysis of federal data shows that only 1.16% of all applications were approved as of April 29, 2021. It is unclear how many of these applications or approvals are PLUS borrowers.
Parent PLUS borrowers must first consolidate their loans into a direct consolidation loan and enroll in an income-based repayment program in order to make the appropriate payments.
Use closed school and borrower protection. When schools suddenly close or resort to cheating, student loan borrowers, including parents, are not necessarily on the hook to pay off their debt.
Under closed discharge policy, if a school closes while a student is still attending school, all or some of the PLUS Parental Loans used to pay for the program will be paid on closed discharge from school, according to the Department of Education.
If a student loan borrower is misled by their school or the institution has violated state laws, parental loans can be repaid through a forgiveness program called borrower protection until maturity. According to the borrower protection guidelines, PLUS parent loans will also be canceled if the student’s application is approved.
Eligibility for disability discharge. Parent loan borrowers who have become disabled may qualify for discharge for complete and permanent disability… Eligible borrowers must have a physical or mental illness that prevents them from working.
The Social Security Administration or physician must ensure that the physical or mental impairment meets certain conditions.
Refinance privately in your child’s name. The only way to get out of debt is to refinance your child’s name with a private company. By doing so, your child will be legally responsible for paying off the debt you originally took on.
Only a few private lenders do this, and if you do, the loan will no longer be eligible for repayment based on income or possible forgiveness through the federal government. Your child will need good creditworthiness, a history of loan payments on time, and income in order to afford payments.
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Anna Helhoski writes for NerdWallet. Email: email@example.com. Twitter: @AnnaHelhoski.