Should you take out a Parent PLUS loan? – Part 1

Parent PLUS loans are federal loans (made by the government) under the Federal Direct Loan Program administered by the U. S. Department of Education. They are loans made directly to the parent of a dependent student.

They are intended to help parents pay for education expenses for their children up to the cost of attendance minus all other financial assistance. There is a credit check to determine if the borrower has an “adverse credit history” but there is no review of debt-to-income levels (meaning no review of the ability to repay). A co-signer is required if the borrower/parent has an “adverse credit history”.

Generally, Parent PLUS loans are used to help a child get into a more expensive school.

Here’s what the math of Parent PLUS loans looks like:

A child deep in student debt PLUS a parent deep in student debt = the happy American family!

That’s a Parent PLUS loan!

A Bad Idea

My view is that Parent PLUS loans are a bad idea for parents. They have most of the nasty, hardcore, “tie an anchor around your neck” downsides of student loans, but they lack the safety net features recently built into federal student loans made directly to a student.

Marian Wang wrote a fantastic and incredibly enlightening article at The Chronicle of Higher Education titled The Parent Loan Trap where she talks about the subject.

I shared a real-life Parent PLUS story from that article in my post titled Parent Plus loans can ruin your financial life.

“A joint examination by ProPublica and The Chronicle of Higher Education has found that Plus loans can sometimes hurt the very families they are intended to help: The loans are both remarkably easy to get and nearly impossible to get out from under for families who’ve overreached. When a parent applies for a Plus loan, the government checks credit history, but it doesn’t assess whether the borrower has the ability to repay the loan. It doesn’t check income. It doesn’t check employment status. It doesn’t check how much other debt — like a mortgage, or other student-loan debt — the borrower is already on the hook for.

“Right now, the government runs the program by the seat of its pants,” says Mark Kantrowitz, publisher of two authoritative financial-aid websites. “You do have some parents who are borrowing $100,000 or more for their children’s college education who are getting in completely over their heads. Those parents are going to default, and their lives are going to be ruined, because they were allowed to borrow far more than is rational.”

One of the financial hazards of Parent PLUS loans is the government will lend money, either in small amounts or in huge amounts, regardless of the ability of the parent to repay the loan. They don’t even check their income. They just loan the money after checking whether the parent has any “adverse credit history” indicators on their credit report.

This is a debt trap that is best to avoid.

“When Victoria Stillman’s son got into Berklee College of Music, she couldn’t believe how simple the loan process was. Within minutes of completing an application online, she was approved. “The fact that the PLUS loan program is willing to provide me with $50,000 a year is nuts,” says Ms. Stillman, an accountant. “It was the least involved loan paperwork I ever filled out and required no attachments or proof.”

She decided against taking the loan, partly because of the 7.9-percent interest rate. Although it was a fixed rate, she found it too high.”

If you are considering a Parent PLUS loan, you would be wise to do your “homework”. Dig into how these loans really work. Look at the promissory note they require you to sign.

Research what happens if you have trouble paying the loan back. Don’t just rely on what the financial aid office at the school is saying. They don’t know the truth about how nasty Parent PLUS loans are when things don’t work out well later.

They only know that if you say “YES”, then they get paid – end of story. They are not bad people. They just don’t know how these loans can cause financial harm later in life.

Parent PLUS loans are all about education, right? OK, now it’s time to do some homework (research) before they put the test (the promissory note) in front of you.

I hope you pass the test with flying colors (and you end up with NO Parent PLUS loans)! :-)