Repaying the Parent PLUS Loan

Parent PLUS loans can be a double-edged sword for many borrowers. While these loans fill in the gap between a student’s scholarship awards and financial aid to make college financially feasible, they can leave parents struggling financially, especially if those parents are still paying off their own student loans, making house payments and trying to put money aside for retirement.

High balances and high interest rates can wreak havoc on parents’ budgets. A Direct Consolidation Loan may offer some financial relief in these cases, but a PLUS loan remains your responsibility throughout the life of the loan because the payments can’t be transferred to your student. To weigh the benefits and the risks, start by reviewing your student’s school award letter to get a feel for all of the scholarships, grants and financial aid that your child qualifies for in addition to subsidized and unsubsidized direct loans and other student loans.

What is a Parent PLUS Loan?

The federal loans that parents of dependent undergraduates take out to pay for their children’s college education are called PLUS loans. The United States Department of Education offers these federal loans through the Direct Loan Program to parents and to graduate students. Unlike traditional student loans, which have several options for student loan forgiveness, Parent PLUS loans come with limited options if you struggle to make payments.

Although gifting your child money to help him or her make loan payments can be a feasible alternative, be aware that gifting more than $14,000 goes toward your lifetime exemption for the gift tax. You need to file a return along with Form 709 to submit to the Internal Revenue Service. Only once you reach your limit of $5.34 million do you need to pay an actual gift tax.

To figure out if you can afford to take on a Parent PLUS loan, count on paying roughly $120 per month for every $10,000 you borrow. Multiply that number by the number of years your child’s degree takes and the number of children you have who are planning to attend college.

Louise and Robert: A Real Life Example

To illustrate this further, consider the example of Louise and Robert. They have four children, two of whom plan to attend four-year colleges:

Tyson attends a public university with an annual tuition of $10,000. He gets no scholarships, but he does take out federal student loans for $5,500 the first year, $6,500 the second year and $7,500 for both the third and fourth years. Louise and Robert decide to take a PLUS loan to cover Tyson’s remaining tuition balance, which totals $13,000 for all four years. Using the formula of $120 per $10,000, their PLUS loan payment is more than $150 per month.

Alexa attends a private university with tuition of $30,000 per year. Although she takes out the maximum amount of federal student loans available, Louise and Robert also take on a total of $93,000 in PLUS loans to cover Alexa’s balance. This brings their Parent PLUS loan balance to $106,000. Using the formula of $120 for every $10,000, this brings their total payment to more than $1,200 per month.

Parent Plus Loan Application

To apply for a federal Parent PLUS loan, you first need to complete the Fee Application for Federal Student Aid (FAFSA). To complete the FAFSA, you and your spouse need your driver’s licenses, Social Security numbers, birthdates, most recent income tax returns, bank statements, W-2s and documentation about any investments. Visit FAFSA.gov to complete the application and file it online. Typical processing times range from three to five days.

If you’re unsure about taking on a Direct Parent PLUS loan, consider becoming a loan cosigner for your child’s student loans. This enables your student to become eligible for private student loans beyond the federal loan amounts, which reduces the gap and can even eliminate the need for a parent loan. Cosigning a loan makes you responsible if your child fails to pay the loan after graduation.

Parent Plus Loan Forgiveness

The Parent PLUS loan interest rate for all PLUS loans disbursed between July 1, 2016 and July 1, 2017 equals 6.31%. This fixed rate remains in place for the life of the loan. If you’re struggling to pay your PLUS loans you have several options available, including refinancing for a lower interest rate and lower monthly payments. To be eligible, you need a good credit score, stable income and full-time employment.

If you’re rejected for refinancing, consider consolidating loans instead. Consolidating your loans organizes multiple PLUS loans into one convenient payment and reduces your payment amount by increasing the life of the loan.

Parent PLUS loans aren’t eligible for Pay as You Earn repayment programs or Income-Based Repayment Plans. Once you consolidate them, the loans become eligible for an Income Contingent Repayment plan, which caps the loan payments at no more than 20% of your discretionary income for 25 years. Any remaining balance after 25 years may be eligible for forgiveness. If you receive PLUS loan forgiveness, that amount may be considered taxable income.

Bottom Line

Parent PLUS loans can be a life raft for families looking for ways to afford college, but they can also create a new set of financial problems. Before taking out a loan, ask several key questions, including:

  • How much can I afford to pay toward the debt every month?
  • Can a PLUS loan prevent me from reaching my financial goals?
  • How much do I want to help my child? Do I want to cover the entire expense, half of it or a quarter of it?

Ultimately, you need to balance your need, desire and ability to help pay for your child’s college expenses with your ability to save for retirement. Create a plan to repay Parent PLUS loans that includes the ability to continue putting money into a 401K or IRA account.

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Published September 9, 2016
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