Families are constantly faced with difficult decisions when determining how to pay for their children’s college education. Many parents often take on Parent PLUS Loans to cover the cost.
Parent PLUS Loans are federal loans for the parents of dependent undergrads who are often denied a private loan for their education.
“A lot of parents are taking these [Parent PLUS Loans] out for their children’s education right now. The cost of education has ballooned over the past few decades, and so parents are really trying to figure out how to make up for this gap in funding by taking on new loans on behalf of their children,” Amy Czulada, outreach and advocacy manager at the Student Borrower Protection Center said.
The Student Borrower Protection Center as a nonprofit focuses on alleviating the burden of student loan debt in the country, from predatory private lenders to federal student loans like Parent PLUS Loans.
Today is National Parents’ Day, which recognizes, honors and uplifts the role parents play in raising children. Often parents help their children navigate affording a college education whether it’s in small ways like sharing their income information for the Free Application for Federal Student Aid or in large ways by paying their kids’ loans back.
Rather than the student borrowing money, some parents take on Parent PLUS Loans offered by the U.S. Department of Education that tend to have higher interest rates than other federal loans as well as high origination fees – a percentage of your loan amount the lender charges for processing your loan.
While Parent PLUS Loans have higher interest rates then other federal student loans they also provide repayment options and access to forgiveness programs. This makes these loans more appealing to parents compared to private loans that have less flexible repayment options.
With more leniency for the amount borrowed, PLUS Loans allow parents to take out larger sums to cover their child’s education. Some parents borrow up to the full cost of their child’s tuition, minus any financial aid they’ve been awarded.
“It’s a matter of understanding all of your options and really trying to do your research to make sure you’re taking as much federal money as you can before you have to resort to private student loans,” Czulada told Reckon.
While it is common for many people to support and raise a child, only a biological parent, the spouse of the student’s biological or legal adoptive parent can apply for a PLUS Loan, according to Federal Student Aid.
This excludes grandparents, guardians and adult non-parents legally responsible for a child.
By the end of 2023, close to 3.8 million people applied for a Parent PLUS Loan, currently accounting for 7% of the total $1.6 trillion student loan debt crisis.
Taking on student loan debt has left many Americans financially strapped as millions of borrowers have been in limbo with false alarms of cancellation, garnished wages and impacts to their credit score.
Affording repayment of student loans have left many borrowers making choices like going into default. As of 2021, nearly 13% of Parent PLUS Loan borrowers defaulted on their loan within four years of their child’s graduation.
Parent PLUS Loans have increasingly grown to assist many families with low incomes with additional assistance in paying for their children to go to college. While offered to parents as an alternative option to cover the cost it has left many families in significant amounts of debt.
According to the Department of Education, one in four Black families with college students use Parent PLUS Loans. During the 2019-2020 academic year, 25.9% of Black students pursuing a bachelor’s degree had a parent take out a Parent PLUS Loan to help fund their education.
These student loans have sent millions of people to college since they were first offered in 1980. As much as they have helped students receive a higher education they have also financially burdened families across the country.
Reckon spoke with the Student Borrower Protection Center about the good, bad and ugly of Parent PLUS Loans.
The following has been edited for length and clarity.
THE GOOD
How do Parent PLUS Loans contribute to making higher education accessible to students who might not otherwise have the financial means?
It offers folks an option for paying for school that they might not otherwise have and if a person has the option of taking out a Parent PLUS Loan for their children or having their child take out a private student loan in their name – then I would say private student loans can be incredibly risky. They’re not subject to the same interest rates that federal student loans are.
There’s fewer protections for private student loans. When compared to some of the other options like private student loans, parent plus loans at least have some protections, which is a plus because it can save folks from maybe a more predatory situation.
How do you feel Parent PLUS Loans positively impact families and students?
Parent PLUS Loans can be a lifeline to students who maybe wouldn’t be able to go to school otherwise because of financial reasons.
We don’t often spend a lot of time talking about the good associated with student loans or Parent PLUS Loans.
Unfortunately, we have a debt-financed higher education system and that’s the way it is for right now. So as we dream a new world into existence that doesn’t require Parent PLUS Loans as a way to finance school, we work to help people from that gap in funding. And that is certainly a good thing.
THE BAD
From your experience in working at the Student Borrower Protection Center, how often do you hear stories of parents struggling with the financial burden of Parent PLUS Loans affecting their finances?
We hear them pretty often because it’s a growing phenomenon. Folks are really entering retirement with not only loans for their own education, but then these Parent PLUS Loans from their children’s education.
So folks feel really trapped and they feel like there’s no way out of it. We’ve also heard stories of folks getting their Social Security checks garnished because of these loans and a lot of times this is people’s main source of retirement income. And then it gets depleted because of student loans they took out because they wanted their kid to get an education.
While most parents are supposed to be entering retirement, their golden years and enjoying a non-working life, some still have the burden of these Parent PLUS Loans over them.
What are some common challenges and concerns that parents face when repaying Parent PLUS Loans?
Parent PLUS Loans have traditionally been excluded from all sorts of things over time. First, they are only eligible for one type of income-driven repayment plan, the income-contingent repayment plan. And parents have to consolidate these loans in order to access that repayment plan.
A lot of times loan servicers might not even tell parents all their options or that they have to consolidate these loans.
Secondly, the income-contingent repayment plan is tied to your income and not tied to the entire balance of the loan, so in most cases they are the most affordable for folks. But it keeps folks trapped in making monthly payments that can be quite high in price.
THE UGLY
What are the risks of Parent PLUS Loans impacting parents’ retirement savings and financial security?
If you’re making student loan payments as a Parent PLUS borrower or you are a borrower paying off your own education – then all of that money that you’re paying towards those student loans can’t be put into a retirement account. That’s money you can use for your actual life going into student loans.
If people have a tiny bit of disposable income that they want to put towards retirement so that they have more for the future, student loans inhibits folks from being able to do that.
In the most severe cases, folks going into retirement are also in default on their student loans. This makes it extremely difficult for people to find housing or even fill out an application for an auto loan because their credit is so damaged by these loans.
It’s a really severe crisis and is ballooning into something bigger for older borrowers who take on Parent PLUS Loans.
