The federal Parent PLUS program allows parents to borrow up to the total cost of a student's education. Eligibility is not based on need, making the loans enticing for middle-class families that don't qualify for federal student aid. However, one in five of Parent PLUS borrowers have children who qualified for the federal government's need-based Pell grants, according to Mark Kantrowitz, publisher of finaid.org. Parents from either group can over-borrow with surprising ease.
The only eligibility requirement for a Parent PLUS loan is that parents must have no adverse credit history — income levels and current indebtedness are not checked. Parents who continue to borrow through the Parent PLUS program to stay ahead of debts could remain within the "no adverse credit" rule, even though they might be accumulating debts that far exceed their ability to repay, said Megan McClean, director of policy and federal relations for NASFAA.
Despite the dangerous ease of over-borrowing, Parent PLUS loans are a better choice than private loans for financing a child's education, McClean said.
"We encourage students and families to exhaust federal options before going to private loans," she said. "Federal loans offer great protections, like a grace period after graduation. And they are dischargeable upon death or permanent disability."
Parent PLUS loans, used carefully, can be appropriate for helping a child get through an undergraduate program, said Joshua Cohen, a Connecticut attorney who focuses on student loan issues. Parents of graduate students shouldn't take Parent PLUS loans, though, because graduate students have access to federal loans whose future payments can be adjusted to their income level. It's an advantage the parent loans don't have.
"Throw the loan on the kid, because they can have an income-based payment," Cohen said.
Taking out a life insurance policy on a child you've co-signed with on a private student loan isn't a bad idea, Cohen said — but that won't cover most of the life events that could leave parents holding the bag. Parents can be tapped to pay back loans they co-sign if a child is unemployed, under-employed, has a serious medical problem or simply doesn't pay, he said.
Some parents tell Cohen they co-signed a loan so their child could go to school and didn't consider the possibility that they might have to pay back the money. Parents who talk that way make him crazy.
"Parents need to understand the legal ramifications of what they are doing when they sign a loan," he said. "Legally, they are on the hook for the loan. If a parent comes out and admits they never intended to pay, that's fraud on the bank. If they co-sign, they are 100 percent billable for the loan, no matter what happens."
There are many ways parents can avoid getting caught in the student loan debt trap. Here's what the experts say:
MONEY Magazine: The amount parents borrow for all of their children's educations should not exceed their annual salary and should be repayable within 10 years or in time for retirement, whichever comes first.
Jim Yannopolous, a Pennsylvania financial aid consultant: Families should do careful up-front research about which school a child will attend. Choosing the most prestigious school that will accept a student isn't always the best idea. A respectable school one rung down the prestige ladder might offer a bigger aid package and provide more opportunities for honors courses and internships. (Needy students with excellent grades can make this work in reverse, Yannopolous said. Some Ivy League schools have big aid budgets for those students.)
Yannopolous said parents would be wiser to hire an academic tutor for a child than spend resources chasing after athletic scholarships. U.S. colleges offered $1 billion in athletic scholarships last year, but they gave out $10 billion in academic scholarships that had the added benefit of keeping students focused on academics while in college.
McClean said parents and students should start early to begin talking about college, start savings plans and learn about the admissions process — by the time the child is in 6th or 7th grade. As high school graduation nears, use financial aid officers on college campuses as a resource to help them understand the ramifications of scholarship offers and loan documents.
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