Read this before you take out a Parent PLUS loan

This article is scary . . . and while I am not a finance expert, it sounds like the government gives huge amounts of money away freely to people who may not understand the repercussions of taking on more debt than they can afford, and the colleges, public and private alike (but especially private) seem eager to keep their costs high and get their hands on as much of this money as possible. What motivation does any school have to keep tuition costs under control when they know parents can and will borrow the full amount, whether or not it makes financial sense for them?

We have had a long and difficult journey with our son, the oldest of three. As a musician he set his sights high–Berklee College of Music, Belmont University, University of North Texas music program. He got enough merit aid at UNT to make it possible, but got nervous on his audition and ended up on the waiting list, too far down to hope for a spot in his program. Next he set his sights on Belmont for their music program, but the 10k scholarship they offered only scratched the surface of an estimated first-year total cost of $48,000. Same with Berklee–10k in scholarships but nearly $70k per year to attend, not to mention air travel and the logistics of going a thousand miles from home. The "aid’ packages from both Berklee and Belmont CONGRATULATED us on the offers of Plus loans to cover the full amount not covered by scholarship or Stafford loans. I’m with some of the other commenters here; the opportunity to go head over heels into debt slavery is nothing to celebrate. An “award” should be just that–a gift, not servitude. The way they package loans is deceptive–you assume if an amount is offered, some professional has reviewed your FAFSA and determined that you can pay back that amount–but I knew based on our finances (and two younger children entering college in a few years) that it would be financially crippling to take out that much money and that we would never retire or be able to do anything but service that debt.

We have always told our kids “in state or equivalent.” We let him try at the “dream schools” for music but the offers just weren’t enough. It is hard because as parents we do want their dreams to come true, but we also recognize that borrowing $50 or $70k per year for a school whose graduates make on average around $30k per year does not make sense. Sure, he might make it big, and they love to tout their famous alumni, but they fail to mention the many thousands of others who don’t end up famous or in arts careers. We’ve told him that it’s not the school that makes you, it’s YOU that makes you. We had to make the decision for him to enroll at a quality in-state institution with the best music program in our state/region. Between what we’ve saved and its reasonable cost, plus him working summers or on campus, we hope to get him through without debt. While we have twinges of doubt and regret about not sending him to one of his more glamorous choices, this is the best decision for our family and an opportunity to teach all 3 of our kids about living within our means and buying what we can afford. Our hope is that when he graduates in a few years, if he decides he wants to run off and try to make it as a musician, he can do so without the cloud of debt hanging over his head–or ours.

Loans are a necessity for many families, even for state schools, and each family must do what works for them–but the nature of these loans needs to be more transparent when they are offered so people know exactly what they are getting into. As long as people go in with eyes open and borrow only what they can reasonably repay, I see no problem. But those who borrow hundreds of thousands for a big name school when more affordable options exist–and then complain–that I just don’t get or sympathize with. There is nothing wrong with obtaining a degree by more affordable means, and in most cases, employers will be looking for skills, not institutional pedigrees. Everyone has to live within their means, and that includes how much they borrow for cars, houses, and college.

Incidentally, I teach at a community college. They are an excellent start to school and an unfairly maligned way to make college costs more reasonable and avoid crushing debt. They may not be as exciting as living away at a big name school, but they get the job done with small class sizes and cheaper tuition. We have famous alumni, too!

@WISdad23 I could not agree with you more! I love your “stupid tax” comment. Taking out a PPL is not a crazy thing to do if it is part of a thought out process. Those who don’t think through the process deserve the consequences. Faulting the lender/government is ridiculous. I know families who have taken $50,000 a year and are gradually paying $600, $1,200, $1,800 and $2,400 a month as their child moves through the college experience. Is that crazy? If the parent can’t afford it YES! But they knew damn well that would be the case before they took the loans
so why blame the lender/government. :-?

It sounds like everybody involved in the loan transaction, the student, the obligors and anyone not obligated on paper but whose income will likely need to be used to repay the loan should take out a life insurance policy or increase their current policies to cover the full amount of the loan, included anticipated interest accruals. For PLUS loans, if death of the student or guarantor triggers full forgiveness of the loan, then insurance wouldnt be needed for any of these covered parties. All parties likely need to be covered for other types of loans.

We know of a family whose son tragically passed away while attending medical school. His parents had largely financed his education through home refinancings, with the idea that their high earning future son would help with the future repayment. Now they are faced with the double heartbreak of the loss of their son and possibly, the loss of their home. Horrible situation.
Term life insurance is usually not super expensive, so hopefully most people who are taking out loans can also purchase a term life policy to protect themselves. In a perfect world, everyone would also obtain disability insurance, as well.

If you have outstanding credit - a private student loan may be more affordable than a PLUS loan. If you are going to borrow to pay for school consider buying cheap term life insurance on your child so that you can repay the debt in the horrible circumstance that something happens to your child.

@1966Parent The concern with taking a private loan is it must be paid if the parent or the student dies. Not so with a PLUS loan.

If you have good credit, even with the additional cost of sufficient life insurance to cover the amount of the loan for the untimely passing of the student or cosigner, a private loan could be substantially cheaper–often no origination fees and lower interest rates than a PLUS loan. Many working adults already have life insurance and the monthly cost of a good term life insurance policy for most college students should be affordable.

@1966Parent and @ARTCC are there actually private loans with lower rates? I’ve seen low rates advertised, but I don’t know anyone who’s actually gotten them. My husband and I have tippy-top credit and considered a private loan for cash flow management for one of my daughters
 Discover advertised rates starting below 4%. We cosigned for my daughter (who has good-ish credit, nothing negative, but a relatively short history) on the application, expecting a decent rate. They came back to us with about 10%, IIRC. We couldn’t get an answer about why – they acknowledged that we had great credit scores, were low risk, had the ability to pay it back, etc, etc. We’ve never had a problem refinancing our house, getting good car loans, etc. More than one rep I spoke with at Discover said that was a pretty common rate, and that they didn’t know any circumstances with people getting the much lower rates. REALLY?

Obviously we didn’t take the loan. But I worry about people who don’t realize they’re getting a different rate than they applied for, or who don’t realize what a difference it makes, or who think they don’t have a choice.

Hello,

If PP loans do not require income qualification but only good credit, is there a FICO score threshold above which these loans are granted ?

I am a USA citizen with reasonably good credit score but since I have been living outside the USA for the past few years, I can start again building my credit history if required, since my kids still has couple of more years before he goes to college.

Thanks.

There really aren’t qualifiers, just disqualifiers. A parent plus loan should be approved for an applicant who hasn’t declared bankruptcy in the prior 5 years, is not more than 90 days delinquent on any ‘major’ debts (which they define as over a certain $ amount, like $3000, so they are looking for default on a mortgage payment), and hasn’t defaulted on other government debts, like the parents own student loans, a military loan, FHA mortgage, etc.

For private student loans to parents, better rates may be available to applicants with higher credit scores, but that’s really up to the bank.

Spend some time studying the differences between private and PPL loans. PPL’s are the better way to go if you can’t afford to cash flow the tuition. I would never attach anything to my house.

what are the alternatives ? Parents who cant tap into their assets what are they to do ? If you don’t own a home and taking an equity liner of credit isn’t an option , there isn’t much choice .

Agree with @alohasue that sometimes parents have no options, so no judgement please. Depending on which school my son decides on, we may have to go this route to close the gap and I have some questions. I was going to post a new thread, but might as well jump on this one (if I don’t get answers here will start a new thread). How exactly does the Parent Plus loan work? Do you reapply each year? If we want to take out $10,000 a year, do we apply for a $40,000 loan one time or do we apply for $10,000 each year? Thanks.

“sometimes parents have no options” - There might be options for cheaper schools (or Community College). I’m not saying it’s the right choice here. Just a reminder for each family to study pros/cons of all paths.

@momof2boys65 you take out a loan each year and sign a master promissory note which can be used for subsequent years (it states all the terms and conditions). When your student graduates you will have 4 notes with (most likely) different interest rates that all fall under one master note. The loan servicer will set up repayment and you may be able to get a reduced rate if you set up an auto debit.

@momof2boys65 – it’s a year-by-year thing and you can adjust as time goes on. I took PLUS loans for my kids and it was fine. I reevaluated year by year and generally took about $8000 per year, but didn’t need the loans every year, and had them all paid off 2 years after my younger child graduated.

My one piece of advice is don’t defer payments, because that increases the loan balance, so then you are paying interest on interest. If you borrow for fall of 2018, your first payment will be due around February or March of 2019.

I looked at the PLUS loans as a way to extend purchasing power based on my available funds and budget. So if I could come up with $10K for the year, but the college wanted $16K – I could do the math to figure out how how much I could borrow, what my payments would be, so that my combination of direct payments and loan payments of $10K would equal the $16K the college needed. (Not just a matter of borrowing $6K, because I had to account for the loan payments – but it still was a math problem with a solution). I knew what my overall cap was and I really didn’t worry to much about the interest rate, because I always intended to accellerate payments after kid #2 graduated.

Thank you @calmom and @lastone03 for the helpful answers! And yes if course I KNOW there are other options like a cheaper school. S18 did get into some of those! I just want him to be able to go to his first choice and I am willing to take out loans to make sure that happens.

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They actually disburse the loans by school term (quarter or semester). Interest starts accruing from disbursement, but it is simple interest, not compounded.

You have to request deferral if you do not want to repay while your student is still in school.

I’d add that I had a figure in mind from day #1 that was the max I was willing to take out for 2 kids, and also a figure that was the max I was comfortable with as a monthly payment. One reason I liked the PLUS option was it afforded some flexibility in renegotiating payment terms in the event of an interruption in income. In the end I didn’t need that, but I also never had to worry that my house would be on the line if I got sick and couldn’t work.

Parents get in trouble when they borrow more than they can afford, and the option to defer payments while the student is in school makes the process of borrowing too much a lot easier.

But it is a good option for those of us who can handle credit responsibly but aren’t in a position to fund our kid’s college with cash.

“I just want him to be able to go to his first choice and I am willing to take out loans to make sure that happens” - Thatt is an admirable show of parental support. (We were too wimpy to do that, but our jobs were both seeming “iffy” when we we were at the decision point. But for other parents in more stable employment situations, it can make sense.)

@colorado_mom, @calmom, @twoinanddone , @momof2boys65, @lastone03, @alohasue

Do you any spreadsheet template which lays down comparisons between PLUS loans and private loan?
Our “aid” package from Northwestern (NW) only contains LOANS.
NW offers loan at 3.5 to 4% whereas PLUS loans is about 7% plus 4% fee i.e. approx 11%.
From rates itself, it appears NW loan is cheaper.
I, however, do not understand repayment schedules with either loans.
Any help is appreciated.