College tuition: The pitfalls of Parent Plus loans
It’s easy for parents to get federal loans to help their children pay for college, but “repaying them is another story,” said Josh Mitchell in The wall Street Journal. Roughly 11 percent of the more than 3 million Americans with outstanding Parent Plus loans have gone at least a year without making a payment, exceeding the default rate on U.S. mortgages during the housing crisis. The government program allows parents to borrow as much money as needed to cover their child’s tuition and living expenses after they max out other financial aid options. “The problem is that the government asks almost nothing about its borrowers’ incomes, existing debts, savings, credit scores, or ability to repay.” And, like other student loans, Parent Plus loans are “nearly impossible” to discharge in bankruptcy. As a result, many distressed borrowers “have delayed retirement, put off health expenses, and lost portions of Social Security checks and tax refunds to their lender—the federal government.”
“Parent Plus loans can be a smart option for some families,” but only if they can truly afford it, said Betsy Mayotte in USNews.com. Many people erroneously assume that because they’ve been approved for a loan, they must be able to make the payments. “Not necessarily.” with Parent Plus, only people “with some fairly large dings on their credit will be denied in the first place.” And with no debt-to-income requirement, even households with an expected family contribution of zero—the amount the government has calculated that the family is able to afford for college—“can be approved for tens of thousands of dollars” in loans. To determine if you can manage the loan payments, “assume about $120 a month for every $10,000 borrowed” each school year. Then multiply by the number of years it takes to finish school and the number of children attending college. That’s your likely monthly payment for the next 10 years.
Better yet, save as much as you can before you have to go into debt, said Tom Anderson in CNBC.com. Fidelity suggests this rule of thumb to figure out where your savings should be each year: “multiply your child’s age by $2,000.” That should keep you on track to cover half the average cost of a four-year, public university. By the time your kid is 18 years old, “your $36,000 fund could reduce the cost of school by 50 percent with the rest coming from financial aid, student loans, and family earnings.” The plan also assumes you’re using a taxadvantaged 529 college savings plan. In general, parents should be skeptical about taking on debt of their own to finance a child’s education, said John Wasik in CBSNews.com. “At the very least, educate yourself about what taking on this debt will mean to your financial future and retirement.”