Parent PLUS loans can be risky

Federal Direct PLUS Loans, commonly referred to as a Parent PLUS loans, are available to eligible parents of dependent undergraduate students to help pay for a child’s college education. Unlike all other Federal student loans, there are no explicit borrowing limits for Parent PLUS loans. Parents may borrow up to a college’s full Cost of Attendance (COA), which is determined by the institution and includes tuition, books, travel, and living expenses. A parent can borrow up to the COA less Federal Pell Grant funds received.

The interest rate for Federal Parent PLUS loans for the 2024–2025 school year is 9.08%, the highest rate in over 30 years. The interest rate and is set on July 1 each year for new borrowers and is fixed for the life of the loan. The rate is based on the most recently auctioned 10-year Treasury Notes. Borrowers also pay an origination fee of 4.228% of the loan principal, which is deducted from each disbursement. Parent PLUS loans are not subsidized by the Federal government, so interest begins to accrue on the outstanding loan balance as soon as funds are disbursed and continues to accrue even if the loan is in deferment.

Parent PLUS Loan Eligibility

To be eligible to receive a Parent PLUS loan, a parent must:

1.      Be the biological or adoptive parent or the stepparent of a dependent undergraduate student enrolled at least half-time at an eligible school. Grandparents, unless they have legally adopted the student, and legal guardians are not eligible to receive parent PLUS loans even if they have responsibility for raising the student.

2.     Not have an adverse credit history. An adverse credit history is defined by the U.S. Education Department (ED) as follows:

·        Discharging debt in bankruptcy,

·        Being subject to a tax lien, or

·        Being more than 90 days late on a payment of $2,085 or more, and

3.     Meet the general eligibility requirements for Federal student aid.

Parents have the right to appeal an adverse credit decision if it was made in error, is missing important information, or is based on information that is now out of date.

Why Parents Choose Parent PLUS Loans

There are currently 3.9 million parents with outstanding Parent PLUS loan balances of $112 billion. Many of the families that take out Parent PLUS loans have difficulty in repaying them. A high percentage of borrowers get in over their heads because, if they choose, parents can fund the entire cost of a child’s college education with Parent PLUS loans, up to the aforementioned COA less Pell Grants. Parent income is not considered and there is no set limit on borrowing.

Repayment of a Parent PLUS loan often takes 25 years or more — retirement age for many parents. A serious hitch in these loans is that, if parents default, the Federal government will deduct up to 15% of their Social Security benefits to repay an outstanding balance. Although it’s unwise for parents to borrow more than they can repay, it’s difficult to fault them since they are simply paying for their child’s education with the financial aid that’s available to them.

Parent PLUS Loan Forgiveness

Parent PLUS loans may be eligible for Biden Administration student loan forgiveness plans such as the Public Service Loan Forgiveness (PSLF) plan. These laws are ever changing so please seek guidance before applying for forgiveness. We can help in this area.

PLUS Loans in Context

How did a situation arise in which Federal student aid funds are loaned to borrowers who are at a high risk of not being able to repay them? There were sound reasons for Congress to create the Parent PLUS loan program in 1980. College costs had increased significantly in the previous decade and many middle-income families were struggling to pay college costs out of income.

Interest rates were extremely high in 1980. The Parent PLUS loan program, which featured a lower-than-market interest rate for uncollateralized debt, mitigated the problem by making it easier for parents to borrow from the Federal government. Initially, parents could only borrow up to $3,000 per year. In 1992, the upper limit was removed after an aggressive lobbying effort by associations of colleges. Colleges favored the program because it enabled them to raise tuition. As colleges raised tuition and the cost of college continued to escalate, they began to include information about Parent PLUS loans in the communications they sent to families. This served its purpose and demand for the loans rose.

Alternative Solutions to the Drawbacks of Parent PLUS Loans

Two good solutions from the perspective of colleges and students are; 1.) the Federal government should increase Pell Grants for low-income students, and 2.) states should subsidize their public college systems more generously. In March of 2024, President Biden signed into law the Further Consolidated Appropriations Act of 2024, which provides for a Pell Grant maximum of $7,395. There is consideration being given to a doubling of the 2023 Pell Grant to $13,750. Unfortunately, the second solution is politically and fiscally untenable in most states.

Another means of relief would be a better repayment plan that is based on parental income. It can feature a significant abatement of the principal after a fixed period of time. This approach is exemplified by the Administration’s SAVE program, which is currently held up in court.

Applying

Parents who wish to apply for a Parent PLUS Loan may do so by using the online application at studentaid.gov. Parents should note that most colleges require the submission of the PLUS loan application online, but some colleges have a different application process. Before applying for a PLUS loan, families should have submitted the Free Application for Federal Student Aid (FAFSA) form to the ED.

Lastly, please remember, the repayment of this loan is on the parent.  We had a client that was in his 70’s that was still paying on a Parent PLUS loan.

We are here to help!

Do you have a Parent PLUS loan?  We might be able to help.

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All the best.

Rick Fingerman, CFP®, CDFA™, CCPS®

617-630-4978

Rick@PlanWithFPS.com

Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, medical, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS