7 things you should know before taking out a Parent PLUS loan
Before my junior year at Reed College, I found out I was losing a big chunk of my financial aid. As a low-income student, I was told that my only option besides dropping out was to take out a Parent PLUS loan — a risky type of federal student loan taken out by a parent on behalf of a student.
I’d already exhausted all the other federal loans I could take out, and I would have done anything to stay in school. So, when I was 19, my mother took out $16,000 in her name. I quickly came to regret it. I’ve been paying off my mother’s Parent PLUS loan for three years. Despite this, the loan has ballooned to $18,000, and I’ll be paying it off for another 20 years.
My story is not unique. The rising cost of tuition is forcing more and more families to turn to these loans. Parent PLUS loans totaled $12.8 billion in 2017-18, a 42% increase from 2007-08, according to the Urban Institute.
Here’s everything I’ve learned from my experience with Parent PLUS loans.
1. Parent PLUS loans are risky
On average, Parent PLUS borrowers still have more than half of their initial balance left to pay off after 10 years. Why are these loans such a nightmare to pay off? They differ from standard federal loans in four key ways.
Unlike most federal loans, Parent PLUS loans aren’t eligible for forgiveness plans like the Public Service Loan Forgiveness (PSLF) or Income-Driven Repayment (IDR).
Their interest rate is currently 7.54% versus the standard federal student loan rate of 4.99%.
They don’t have a grace period, where interest doesn’t kick in during college and then for six months after you graduate, like other federal loans.
The lender doesn’t assess parents’ ability to pay based on their income, credit history and other debts, meaning that parents often end up with payments far beyond their budgets.
Basically, you should only take one out as a last resort before private loans, according to Lindsay Clark, head of external affairs at Savia firm that helps borrowers navigate student debt. Even with their lousy terms, Parent PLUS loans are still eligible for some types of federal relief, including the Student Loan Payment Pause, and would maybe qualify if student debt was ever canceled. Unfortunately, private loan-holders are on their own.
2. You’ll want to check your financial aid office’s math
Make sure you’ve eliminated all your options before turning to a Parent PLUS loan. That can mean asking your financial aid office lots of questions and double-checking how your loan amounts were calculated.
After taking out our Parent PLUS loan my junior year, my mom and I discovered that my college was taking my father’s income into account, though he wasn't contributing to my education costs. We petitioned to correct this, and my financial aid increased to fully cover my tuition again for my senior year.
3. Parent PLUS loans can be hard on families
Parent PLUS loans — and any kind of debt that a family member takes on for you — can take a particular emotional toll. Possibly even worse than the $200 that disappears from my bank account every month is the anxiety of knowing that I’ve put stress on and created a long-term financial liability for my mom.
If I miss a payment or default, her credit score and ability to get a loan or buy a house are on the line. Make sure that you and your parents have open and honest discussions about this decision, and they know exactly what to expect going in.
4. It’s better to pay your interest while in school
Most federal student loans are subsidized. That means the government handles the interest when you’re in school and, for many, a post-grad period of six months.
With Parent PLUS loans, interest starts accruing the day they’re disbursed. As soon as you graduate, that interest is added to your primary balance. Let’s say you didn’t pay any of the $4,000 of interest accrued on a $26,000 parent PLUS loan during four years of college. Once you walk across the stage, you now have a $30,000 loan and your 7.54% interest rate now applies to that larger figure. The more interest you pay before graduation, the smaller your balance will be and the less interest you’ll accumulate over the life of the loan.
5. You’ll want to consolidate your loan as soon as possible
Again, one of the major downsides of Parent PLUS loans is they don’t qualify for loan forgiveness programs like PSLF or IDR. However, you can consolidate Parent PLUS loans into a federal direct consolidation loan, which does qualify for PSLF, as well as a particular type of IDR called Income-Contingent Repayment (ICR), intended for low-income students.
Once you consolidate — and right now, while federal student loan payments and interest are paused, is a great time to do it — you’ll have more options. Under ICR, you can have your loans canceled after 25 years of payments. ICR bases payment amounts on your income, allowing for more reasonable monthly payments. If your parent works for a nonprofit or a government agency, you can qualify for PSLF, which forgives your loan after 120 qualifying payments.
Unfortunately for Parent PLUS loan holders, Clark explains that you essentially “reset the count” of your payments when you consolidate, meaning payments made before consolidation won’t count toward any forgiveness programs you become eligible for. This is why consolidating as soon as possible (especially while payments are paused) is ideal: It will make sure the largest possible number of your payments count toward PSLF or IDR relief.
One risk to keep in mind: Consolidation, which is a way to get out of loan default, can only happen once. If you default down the road but have already consolidated your loan, you have to go through a lengthier loan rehabilitation process. You can apply at studentaid.gov, or you can download a paper application to mail it.
6. You’ll want to consider refinancing your loan (maybe)
If you are ineligible for PSLF or earn too much for ICR, you can consider refinancing your loans. Keep in mind that when you refinance federal loans with a private lender, you forgo the chance to participate in federal student loan programs like deferment and forbearance. If you weren’t eligible for these programs anyway, refinancing can be an opportunity to get a lower interest rate and pay off your loan quicker.
7. It’s best to stay informed
Follow the Student Debt Crisis Center, Student Borrower Protection Center and The Debt Collective for resources and updates on student loan policy.
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