Parent PLUS College Loans Can Spell Peril
Since then, average debt through the parent PLUS loans has more than tripled, adjusted for inflation, according to a Brookings Institution report. About one in 10 parents owe more than $100,000. And as loan balances have ballooned, the rate of repayment has slowed.
Now that the college applications have been submitted, Allan Katz, a financial adviser in Staten Island, New York, has this advice for parents contemplating their next move:
PLUS loans should be avoided “at all cost,” he said. “A big part of my practice is avoiding PLUS loans.”
His dire warning stems from the 1993 change in the law, which made it easier for parents to get into trouble. The reform increased how much parents can borrow from $4,000 per year to whatever the teenager needs to cover his or her school expenses – regardless of the institution’s cost. Total borrowing per child used to be capped at $20,000 – there is no limit today.
College is a top priority, and many parents don’t have options other than the federal PLUS loans. But the removal of the borrowing limit combined with rising tuitions have left more parents “saddled with large debt burdens, ultimately repaying just enough to avoid default and sometimes owing significantly more than their initial balance,” the Brookings report said.
PLUS loans permit parents to borrow the total cost of college – tuition, room and board, books, and lab fees – minus any grants and loans the university provides to the student. Assume a conservative $31,000 a year for total college costs. Suppose the student receives $7,000 annually from the university and borrows the maximum for federal Stafford loans every year. This leaves the parents with $70,000 in PLUS loans after four years of college.
But they can easily be in debt for much more, to the point that the payments feel like a second mortgage. First, the interest rate on PLUS loans is a steep 7.6 percent. Second, the compound interest is much higher for parents who take advantage of a different provision in the 1993 legislation that lets them opt to defer their loan payments until after graduation.
An alternative to PLUS loans is a home equity line of credit, which charges rates of 3 percent to 4 percent. “Take it out as you need it, rather than all at once,” Katz said. And pay it down whenever possible.
He said these steps will save money. For parents paying for college and worrying about retirement, every little bit helps.
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