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It appears that the nation’s ballooning student loan debt is not just confined to students.
The crisis, as it turns out, also encompasses millions of parents who are Parent PLUS loan holders. And according to a recent Brookings Institution report some troubling trends are beginning to emerge among parents who borrow money via these federal loans to help put their children through college.
About 3.4 million Parent PLUS borrowers owe $87 billion. (Yes, billion.) That’s about 6% of all outstanding federal student loans. What’s more, the new data show that parent default rates are on the rise, and repayment is slowing.
When the Parent PLUS loan program initially began in 1980, there were limits on the total amount of money parents could borrow to help their children through school, according to the Brookings Institution. Those limits, however, were subsequently eliminated by Congress as college costs rose. And since 1993, parents have been able to borrow as much as the entire cost of attendance for their child’s education (minus any aid received by the student).
The elimination of the borrowing cap is just one feature of Parent PLUS loans that parents should approach with a hefty dose of caution. Yet another is the fact that Parent PLUS loans do not come with many of the same borrower protections that federally backed student loans do.
While experts say Parent PLUS loans definitely have their place, and can be very helpful in closing a funding gap to put your child through college, they should be used sparingly and fully understood before signing on the dotted line. Here are some of the pros and cons of Parent PLUS loans, as well as some alternatives to keep in mind.
Over the past quarter-century, the average annual amount parents have borrowed to help their children pay for higher education has more than tripled.
In 1990, the average parent loan was about $5,200 per year (adjusted for inflation). By 2014, that number had risen to $16,100, according to the Brookings Institution. Since the cap on Parent PLUS loans was lifted, higher borrowing totals have created a situation in which parents are racking up significant balances. About 8.8% of parent borrowers entering repayment on their last loan in 2014 owed more than $100,000, compared to just 0.4% in 2000.
Sabrina Manville, a former university administrator and co-founder of Edmit, a company that helps families with financial decisions related to college funding, suggests a conservative approach when utilizing Parent PLUS loans. She also warns against simply borrowing enough to cover the “total cost of attendance,” a figure that’s calculated by the college or university.
“Parent PLUS loans technically have limits, but they’re very high limits. You can take up to as much as the school tells you it costs to go there for a year,” she explained. “But the cost of attendance is a number that can be pretty inflated. It includes tuition and fees and things that are not negotiable, but it also includes transportation, books, and housing.”
“There are a lot of ways that a person can save money on those other expenses during college,” continued Manville. “So, don’t just immediately borrow that amount the school tells you it costs, because maybe your child’s cost of attendance is lower based on choices being made about housing and other negotiable items.”
In other words, only borrow what you truly need and what you can afford to repay. Don’t map what you borrow to the school’s calculated cost of attendance. Many extraneous costs can be covered in other ways, such as a student getting a job during college to help pay some expenses.
Few parents realize when signing onto a Parent PLUS loan that they’re putting such things as Social Security benefits and tax refunds on the line, should the loan fall into default.
“Your Social Security can be seized to pay for that debt. Federal authorities can garnish wages, and they can confiscate tax refunds,” explained Greg Poulin, co-founder of Goodly, a platform that helps companies offer student loan assistance as an employee benefit. “It’s often not clear or apparent to them that that can happen in retirement. That’s particularly challenging for folks who are low income, because a lot of folks rely on safety nets like Social Security.”
The Brookings report supports this notion regarding the socioeconomic classes most impacted by garnished Social Security income.
“Because parent borrowers are generally ineligible for many of the borrower protections and income-based loan plans available to student borrowers, the consequences of rising debts and declining ability to pay can be severe, especially when borrowers default,” the report states. “In those cases, federal authorities are required to garnish wages and Social Security benefits and confiscate tax refunds—a particular burden on low- and middle-income families.”
While defaults are rare overall, they’re relatively common among low-income borrowers with weak credit, the report notes.
You another red flag raised by financial advisors is the minimal credit check that borrowers go through to establish eligibility for a Parent PLUS loan. Unlike when applying for private student loans, the applicant only goes through a very basic credit review.
In fact, according to the Brookings report, a parent who’s already delinquent on as much as $2,085 in debt is still eligible for a Parent PLUS loan. This is due in large part to regulations issued in 2014, which expanded the eligibility for parent loans to those who have weaker credit ratings. That increased the number of eligible borrowers, including those who had previously been deemed to have an adverse credit history.
“The Parent PLUS loans have more relaxed credit score guidelines, making it easier to qualify for them, which is good and bad,” explained Manville. “It’s good because these loans are an option even if you don’t have great credit. But it can be a slippery slope too.”
Use student loans first: It can often be more cost-effective for the student to access federal loans to pay for school, rather than the parent. The interest rates on a federal student loan will likely be lower than a Parent PLUS loan, said Manville.
“Students should max out their subsidized loans from the government because that’s the lowest rate you can get,” she said. “In addition, you don’t accrue interest on those loans while in school. For Parent PLUS loans, the interest starts accruing right away.”
Bottom line: Be sure to look at all financial aid options available to a student through a school first, urged Manville.
Borrow as little as possible: Financial coach Beverly Miller offers similar advice, noting that it’s the student who should take the lead in paying for college — and that student loans of any type ought to be a last resort.
“If someone is going to take out the loan, it should be the student. It’s the student’s responsibility, and the student loans they’re offered have much better terms. But I don’t want to recommend student loans for anyone,” said Miller.
Ideally, says Miller, rather than loans, parents have been saving since a child’s birth for college education via a 529 plan. In addition, the child should plan on working weekends or summers during college to help defray expenses.
Miller also suggests attending a less expensive community college, even if it’s just for general education credits and then transferring those credits to a more expensive school later. And don’t overlook scholarships and grants.
Be cautious about tapping home equity: And while some parents may qualify for a home equity loan at interest rates below what a Parent PLUS loan can offer, many financial advisors caution against this approach — since defaulting would put your home at risk.
It’s natural for a parent to want to help their child, and that includes assisting with the cost of education. To that end, some financial advisors say Parent PLUS loans can be a good way to create access to higher education.
“We suggest using a Parent PLUS loan if you don’t have any other way to pay for college and you have a student who is focused on what they want to do,” said Dan Evertsz, a late-stage college planning expert with College Money Pros. ”The positive side is that they’re federal loans, so you have alternatives in case down the road you get sick. There are a lot of safeguards in there.”
Unlike subsidized student loans, Parent PLUS loans begin accruing interest immediately upon issue of the loan and monthly payments begin immediately as well. However, payments on the loan may be deferred (with interest) while your child is attending college.
What’s more, similar to a student loan, if you’re unable to make loan payments, it’s possible to change your repayment plan to lower the monthly payment or request a deferment or forbearance, which allows you to temporarily suspend payments.
“The Parent PLUS loan has a lot of the benefits or flexibility,” continued Evertsz. “If something happens, if mom gets laid off, I can defer the payments until my wife gets a job. If you have a private loan, it’s just like a mortgage or a car payment. If you don’t make payment, it’s a ding on your credit.”
Workplace programs that help student loan borrowers repay their education-related debt have slowly been gaining momentum and making headlines. Much of the news surrounding this trend, however, has been tied to programs that help the student, not the parent.
But Poulin says that’s changing. Goodly lets companies offer student loan repayment assistance as an employee benefit. It’s the first platform that allows employers to make monthly payments, integrated with their payroll, directly toward employees’ student debt.
Poulin says there’s been a significant increase in demand from employers seeking to help parents struggling with Parent PLUS Loans.
“Many of the employees on Goodly with Parent PLUS loans have reported the stress of such loans negatively impacting their focus in the workplace, well-being, and retirement planning,” he explained.
What’s more, many of these parents have withdrawn funds from 401(k) plans and other retirement accounts to meet Parent PLUS obligations or are directing money toward repaying these loans instead of continuing to fund their own retirement. Still other parents have taken second jobs to keep up with the payments.
But with increased employer participation in programs like Goodly, the future for parents in debt doesn’t have to be so bleak. “An employee with $40,000 in student debt at 8.5% interest and a 20-year repayment period will save about $20,000 in student loan payments and pay of their debt about eight years sooner with an employer contribution of $100 per month,” explained Poulin.
Employer assisted student loan repayment programs are gaining traction. Forbes named it the “Hottest Benefit of 2018.” About 10% of employers are starting to roll-out such programs, said Poulin.
“We’ve been hearing from a lot of employers that when they’re redoing benefits and taking the pulse of their employee population, it’s not just their Millennial and Gen Z employees who are struggling to deal with student loan debt. Baby Boomers are increasingly struggling with student loans as well.”
Mia Taylor is an award-winning journalist with more than two decades of experience. She has worked for some of the nation’s best-known news organizations, including the Atlanta Journal-Constitution and the San Diego Union-Tribune.
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