Top 3 Challenges of Parent Plus Loans
Colleges often encourage parents to borrow through Parent PLUS loans, when facing shortfalls in the financial aid package. These actions could reduce the parent’s readiness for retirement. Before signing the dotted line consider the top three challenges faced with PLUS loans.
- Difficulty transferring student debt to the child’s name. When a parent secures a PLUS loan, it is not possible to consolidate or transfer the debt to the child’s name after graduation, even if the child pays back the loan. Solution: Graduates able to qualify for a private loan may refinance PLUS debt, transferring the obligation to the child’s name. The refinance does convert the federal loan to a private lender, forfeiting benefits found with federal loans.
- Balance saving for retirement and paying off PLUS and personal student loans. Due to the higher interest rate, parents can expect to pay approximately $120 for every $10,000 borrowed. Loans amounting to $10,000 per year for five years, could leave a parent paying over $700 a month for ten years to settle the debt. Solution: Graduates paying the debt for the parent frees up cash flow for retirement savings, but remains on the parent’s credit. Consolidation, extended repayment, and refinancing are options, which may lower the monthly payment, but might increase the total interest paid on the debt.
- Limited repayment options. PLUS loans do not enjoy the same income-based repayment options of personal loans. Solution: Parents have the option to consolidate the Parent PLUS loans with personal student loan debt. Doing so will qualify the parent for income contingent repayment, basing payments on the parent’s income.
Parents should calculate their long-term ability to repay the debt before borrowing. Often students can attend a cheaper school, live at home, or other methods of reducing financial need before turning to PLUS loans.