If your child is heading off to college soon, there’s a good chance you’re thinking about money—and more specifically, where the money is going to come from.
If you're like a lot of other parents, you may need to borrow some money to help cover education expenses. One way parents solve that problem is by taking out Parent PLUS loans. But is that the right move for you?
What is a Parent PLUS loan?
A Parent PLUS Loan is a federal student loan offered by the U.S. Department of Education. You can use this money to cover your child’s college, trade or career school costs that are not covered by other financial aid.
If you qualify, a line of credit goes directly to you, not your child, which means you are responsible for paying back the loan.
What are the pitfalls of a Parent PLUS loan?
Before you say yes to a Parent PLUS loan, consider these potential drawbacks.
1. It's easy to get in over your head
While a traditional lender will vet your ability to repay a loan based on your income, the government does not.
If you qualify for a Parent PLUS loan, you can borrow the maximum amount allowed, regardless of your ability to pay it back. The maximum amount allowed is the cost of attendance (determined by the school) minus any other financial assistance received.
2. Loan payments could affect your retirement savings
A recent article in the Des Moines Register discussed how Iowa parents are going into debt paying for their kids' educations. The article highlighted several parents who were taking on additional work or delaying retirement to pay Parent PLUS Loans. In 2016-2017, the average Parent PLUS loan in Iowa was nearly $13,000, an amount that many families are struggling to pay off.
And that’s not the most concerning part: Nationally, more than 3.5 million people owed a record $83.9 billion in Parent PLUS Loans (as of September 2017), with an average debt load of nearly $24,000.
More than half that debt is owed by parents 50 or older, an age where most people are starting to make plans for retirement.
3. These loans have stringent collection requirements
It can be very difficult to get out of Parent Plus Loans, even if you experience financial hardship. In fact, your wages could be garnished if you go into default, at a rate of 15% of your disposable income.
4. The interest rates are not a bargain
Currently, the rate on a Parent PLUS loan is 7%, which is a lot higher than the federal subsidized and unsubsidized loans, currently at 4.45%.
Before taking out a Parent PLUS Loan, it's smart to shop around to see if you qualify for a better deal elsewhere. For example, taking out a loan with a private lender rather then the government may yield you a better interest rate because your good credit will be taken into account. Right now, private lenders are offering interest rates from 3.54% to 11.80%.
5. You can't transfer a Parent PLUS loan
Parent PLUS loan cannot be transferred to your child after they graduate. That means you are responsible for paying the full amount unless you have your child refinance the loan into their name—which some private lenders will allow, but some won't.
What are the alternatives to a Parent PLUS loan?
If you’re having second thoughts about the Parent PLUS loan, you might be wondering if there are other ways to make college more affordable.
The good news: when it comes to finding money for college, you have plenty of options.
This is a great time to talk to your child about helping with tuition. Even if you have money to cover costs, requiring your child to pay for a portion of their school can keep them invested in the process.
Their first order of business is to have them apply for scholarships. They can also apply for student loans through FAFSA. As we stated above, federal loans dispersed directly to students have a lower interest rate than Parent PLUS Loans.
One other option is to look at cheaper schools. If your child is set on going out of state or to a private college, you may need to advise them to stick closer to home at a public college. They can also look into community colleges, which can save thousands of dollars.
See also: Are Community Colleges a Good Value?
If your child has exhausted all of their other federal financial aid and scholarship opportunities, you may want to consider a private student loan.
Take some time to shop around and look at various rates and fees. Private lenders have a variety of loan options available to fit your personal needs.
For more information, see our guide on The Best Private Student Loan of 2018.