Students take out loans as an investment: presumably they’ll graduate and reap the rewards — income that helps them repay that debt and then some.
But parents borrow for their children without the promise of a higher income. And legally, they’re the ones on the hook.
Federal Parent PLUS loans are easy to get: Colleges often list them alongside grants and undergraduate loans on financial aid letters. They lack traditional credit history and income underwriting requirements. There is also no limit on how much a parent can borrow in total.
These factors make it easy for parents to borrow more than they can afford.
“I feel like parents feel more pressure to take on unpayable debt when it comes to college than anything else,” said Betsy Mayotte, president and founder of The Institute of Student Loan Advisors.
Parent PLUS loans also offer fewer options to make payments manageable, and the navigation is more complicated.
“It’s not insurmountable to access all of these things, but when you put all these things together, it’s a lot of hoops that parents have to jump through to get help,” said Rachel Fishman, deputy director of research at the University of Groningen. Education Policy in New America program, an impartial think tank.
Read: My sister co-signed our cousin’s $35,000 student loans. When he defaulted, she paid them off. Should his parents pay her back?
This is why parent PLUS loans can add up quickly and how struggling parent borrowers can reduce payments and pursue forgiveness.
Why Parent PLUS Loans Are a Repayment Problem?
Parent PLUS loans were initially designed to help middle- and upper-income parents who didn’t have cash on hand but did have assets, said Kristin Blagg, senior research associate at the Urban Institute’s Center on Education Data and Policy. a non-profit research organization. But over time, the target borrower for these loans shifted toward middle- and low-income families.
“The logic of ‘Okay, you have assets you can lean on to repay this debt’ is falling apart for lower-income families,” Blagg says.
Parent PLUS loans are also the most expensive type of federal loan: Currently, they have an interest rate of 6.28% for the 2021-22 school year, compared to 3.73% for undergraduate loans. And they come with higher origination costs – currently 4.228%. Parents who meet traditional income and credit standards can private student loans at much lower rates with no origination fees – but parents with low incomes or spotty credit histories can’t.
Over the past seven years, parental PLUS loan debt has grown from $62.2 billion to $103.6 billion — a 67% increase, compared to a 39% increase in undergraduate student loans.
While there’s little information about borrower default rates, both Mayotte and Fishman say there’s plenty of anecdotal evidence showing that some borrowers are struggling to repay these loans.
Also on MarketWatch: US colleges face a $130 billion crisis
Lawmakers, student debtors and activists have continually pressured Washington to cancel loans as high as $50,000, but no specific proposal has made its way through Congress and there is no guarantee that PLUS loans will be drawn.
Current opportunities for parent borrowers
Here are the options now available to parents:
Pursue means-tested repayment forgiveness. Income-driven repayment is a safety net for all federal student loan borrowers, but PLUS parent holders can only access the most expensive of the four plans: income-related repayment, or ICR. This limits payments to 20% of your discretionary income and lasts for 25 years.
ICR is especially useful for older parents who, once they retire, can expect to have less income than when they took on the debt. After 25 years of payments, the parent borrowers will have forgiven the rest of their debt.
Qualify for public service loan forgiveness. Public service loan forgiveness offers the option of forgiveness after 120 payments while the parent works for an eligible nonprofit or government employer.
However, this cancellation is difficult to realize: Federal data analysis shows that only 1.16% of all applications were approved as of April 29, 2021. It is unclear how many of those applications or approvals are PLUS borrowers.
Parent PLUS borrowers must first consolidate their loans into a direct consolidation loan and enroll in means-tested repayment to make eligible payments.
Use closed school and borrower defenses. When schools suddenly close or engage in deceptive practices, student loan borrowers, including parents, are not necessarily on the hook to repay their debt.
Under closed school discharge rules, if the school closes while a student is still in attendance, all or some of the PLUS parent loans used to pay for the program would be waived under closed school discharge, according to the Department of Education.
Related: A majority of American parents are concerned about their children’s financial future
If a student loan borrower is misled by their school or if the institution has broken state laws, parent loans can be waived through a forgiveness program called borrower’s defense against repayment. Under borrower defense guidelines, PLUS parental loans would also be waived if a student’s claim is approved.
Eligible for dismissal due to incapacity for work. Parent loan borrowers who become disabled may qualify for: total and permanent disability discharge. Eligible borrowers must have a physical or mental disability that prevents them from working.
The Social Security Administration or a doctor must verify whether the physical or mental disability meets certain conditions.
Private refinance in your child’s name. The only other way to get rid of your debt is to refinance in your child’s name with a private company. By doing this, your child becomes legally responsible for repaying the debt you originally incurred.
Only a few private lenders do this, and if you do, the loan will no longer qualify for means-tested repayment or possible forgiveness available through the federal government. Your child must have strong credit, a history of paying loans on time, and an income to make payments.
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Anna Helhoski writes for NerdWallet. Email: firstname.lastname@example.org. Twitter: @AnnaHelhoski.