College costs are high, and students often find that their grant and loan money doesn’t go far enough. So many parents take out PLUS loans to make up the difference. At the time it seems like a good investment in the future. But there are serious downsides to PLUS loans that parents should be aware of.
What Is A PLUS Loan?
A PLUS loan (Parent Loan for Undergraduate Students) is a loan made by the U.S. Department of Education to the parents of a student, to cover part or all of the cost of college. The loan is in the parents’ name, and the parents are responsible for repaying it, not the student.
Why Do People Take Out PLUS Loans?
PLUS loans look good on the surface. They’re easy to qualify for, the interest rate is fixed (right now it’s 7.9%), and there are a number of repayment plans. Besides, for many people, PLUS loans are the only way their child will get through college. Grants are declining; the last time Pell grants were increased was 2003-2004. And college costs are ballooning; from 2003 to 2013, college tuition had an average annual growth rate of 5.2%. PLUS loans make college accessible.
No Limit On The Amount Loaned
According to the Department of Education website, “The maximum PLUS loan amount you can borrow is the cost of attendance (determined by the school) minus any other financial assistance received.” So if the PLUS loan is covering the whole cost of college, it could be more than $200,000. In addition, PLUS loans are often made to people with poor credit and little chance of repaying such a big loan. All that’s needed is for someone with good credit to vouch for the borrowers.
Large Monthly Payments
One couple told msn.com that they’re paying $3000 a month on a $200,000 PLUS loan. That’s 26% of their $11,250 monthly income. Things are even worse for PLUS loan borrowers with low incomes. Department of Education data shows that for people in the lowest 10% of earners, PLUS loan payments take up 38% of their monthly income. As well as interest and principal, there’s a 4% loan origination fee that’s deducted from every payment.
Changes In Financial Situation
Many people take out large PLUS loans, and then suffer financial reverses due to illness, layoffs or other circumstances. They can apply for a deferment, which delays payments up to 3 years, or a forbearance, which delays payments for 12 months. But during this time, interest on the debt accumulates, and it has to be paid eventually. Even if nothing else goes wrong, many parents who get PLUS loans are reaching retirement age, but can’t even consider retiring.
Garnishing of Wages and Social Security
If you default on your PLUS loan, there are dire consequences. The Department of Education will garnish your wages, take your Social Security and pensions, and charge you collection fees and court costs. You can also lose professional licenses and eligibility for any federal benefits, and be reported to the credit bureaus.
Parents want the best for their children, so it’s easy to sign a PLUS loan promissory note to get that child a college education. But it may be better to weigh all the factors first. When you make a leap of faith with college financing, you don’t want a hard landing.
James Pirch is a blogger with two sons in college and thus knows the importance of understanding college loans. In addition to furthering that understanding to keep his family finances stable, he spends some time learning about business bankruptcy to keep his business finances separate from his family’s.