As Lil’ Johnny and Baby girl Sally are preparing to go off to college, your heart leaps for joy! You’re such a proud parent and willing to do whatever is necessary to help them meet any financial challenges they may face by signing your name on the dotted line for a Parent Loan. In your mind, you’re thinking; after all it’s my fault that I didn’t properly prepare financially to pay this PLANNED expense out-of-pocket, right? It was definitely planned because since the day Lil’ Johnny and Baby girl Sally was born, college has always been the plan for their future, right?
Okay, no more shade! Seriously, most of us have dreamed of the day when we pack up our kid(s) and ship them off to college, but the dream of paying for this outrageous expense may not have come true. For years many families have relied on government and private loans to pick up the shortfall for college expenses, however most times we aren’t educated about the consequences of student loan debt. Today in America, we are more than $1.5 Trillion dollars in student loan debt and growing!
Parent loans are rapidly growing and the consequences are becoming so scary. For the first time in my 17 years in this industry, I witnessed someone’s social security income be taken due to a defaulted parent loan. It’s a long story but a true story! Although the repayment amount was small, this amount in her own words was, “it makes the difference in whether I will take my medicine everyday or every other day to stretch my decreased income.” One of the many lessons I learned from this was that student loan debt can follow you to the grave.
Before you consider taking on a Federal Parent PLUS loan, please explore all of your options and know the consequences for default. Federal Parent PLUS loans and private loans do not offer you the same benefits that are offered to your child. Just as there are practical limits on reasonable and affordable debt for students, there are good rules of thumb concerning how much parents should borrow.
- Parents should borrow no more for all their children than they can afford to repay in 10 years or by the time they retire, whichever will occur first. After the parents retire, there is no new income coming in, just assets. When the parents retire, they should pay off all their debts because they will be potentially paying higher interest on their loans than they are earning from their savings.
- Total Federal Parent PLUS loan debt for all their children should be less than the parents’ annual income, and ideally a lot less. If total parent loan debt is less than annual income, the parents will be able to repay the parent loans in ten years or less.
- Parents who have very low-income should not borrow to help their children pay for school. If the parents’ income is less than 150% of the poverty line, the parents should not borrow from the Federal Parent PLUS loan program or cosign private student loans.
- If a parent is considering making large purchases within the next 10 years of taking on a parent loan (buy/refinance home, purchase of a large ticket item), consider your DTI (debt-to-income ratios) for lending purposes.
- Parents can also cosign private student loans, which may have very high annual and cumulative loan limits. Loan balances may increase through interest capitalization if the parent defers repayment while the student is in school. It is very easy for a parent to get overextended when borrowing to help his or her children pay for school.
A $20,000 loan for freshman year may sound manageable, but multiply that by the number of years you expect your student to be in school and the number of college bound children in the household and suddenly you owe $160,000 in Parent Direct PLUS loans, assuming you only have two children.
That works out to about a $1,800 monthly payment under a standard 10-year plan. Parent PLUS loans aren’t eligible for most income-based repayment options, although they may be able to obtain access to income contingent repayment if they consolidate the loans under the Direct Loan program.
But even under this plan, a family of four with a combined adjusted gross income of $80,000 will still have a monthly payment of around $1,000 a month – paying back a total of more than $300,000 including interest. Loan debt like this can affect retirement savings, or even retirement itself.
Many families make an arrangement with the student that while the parents will take out the loan, the student will repay them. Just remember that the loan can never be changed to the student’s name, and all lower payment, deferment and discharge options are based on the parent’s situation, rather than the student’s. With today’s administration and doom and gloom of employment, make sure that you and your student research their career to ensure they have the best possible chances for good employment options. Paying for student loan debt doesn’t have to be a mystery. Start your homework early, seek out all options and ask questions when you don’t know. Take the emotions out of it and consider everyone’s financial future…not just Lil’ Johnny’s or Baby girl Sally.