The Risks of Obtaining a Direct PLUS Loan
Aug 30, 2022 By Susan Kelly

Try to picture this: After graduating college more than ten years ago, your kid has likely settled into fulfilling employment. Your own working life is winding down, and retirement is just around the corner. But you still have a significant financial obligation for your child's university expenses. A lot of parents who get governmental Direct PLUS loans end up in this situation. These loans may seem like a simple method for parents to assist their children with college expenses, but all too often, they end up jeopardizing the parents' ability to save for their own retirement.

The Basics of PLUS Loans

The word PLUS stands for Parent Loan for Undergraduate Students. (In addition, there is a program called grad PLUS that is designed for graduate & professional pupils who borrow money independently.) If a student's educational expenses exceed the amount that may be covered by grants, debts, & work-study, the parent may borrow additional funds via the Parent PLUS loan program.

The interest rate on a PLUS loan will never change over the repayment period. You may repay them over a standard 10-year period or choose an extended payment plan that extends the duration to as long as 25 years. Beginning in 2020, national student loan repayment and interest accrual were put on hold. The borrower of a Parent PLUS loan is indeed the parent, not the student. Regardless of whether the student has the financial ability to pay them, the responsibility for them cannot be passed on to them.

First Danger: There Is No Innate Grace Period

A borrower of student loans normally has six months after graduation to begin making payments. When it comes to PLUS loans, things are different. The payback term begins shortly after the kid or school gets the money. Parent borrowers may seek a deferral while their child is enrolled at least half-time & for five months after graduation.

Danger 2: You Can't Use Most Income-Based Plans to Pay Back PLUS Loans

The federal government provides four income-based repayment options for student loans. They restrict the student's monthly bills to a predetermined proportion of the pupil's income that may be spent freely (often 10%). Any leftover loan debt is forgiven after a specific number of years (usually 20 or 25). Parent PLUS loans, meanwhile, are eligible for just one of these schemes, Income-Contingent Reimbursement (ICR), and solely after the parent has merged their parent loans into a government straightforward consolidation loan. Payments under an ICR plan cannot exceed 20 percent of disposable income and must be spread out over twenty-five years, which is a considerable period in the life of a parent.

Danger 3: It's Simple to Borrow More Money Than You Need

The federal government checks credit reports but not salary or debt-to-income ratios when you qualify for a Direct PLUS grant for your kid. It doesn't care whether you have credit card debt or student loans. A bad credit record is a sole thing it checks for negatively. Following your loan approval, the institution determines the exact sum of your loan depending on its own cost of attendance. Several students cannot afford the full price of tuition and fees at their chosen institution. A consequence of this is that some families may take out student loans for more money than is necessary. If you have additional debt, like a mortgage, repaying the PLUS loan might well be difficult.

Danger 4: Even in bankruptcy, you can't get out

Direct PLUS loans cannot be discharged via bankruptcy; thus, defaulting on one is a disastrous financial decision. Filing for bankruptcy will not eliminate the obligation. The government may garnish your earnings or deduct monies from your Social Security perks and tax returns until the debt is settled. Not only that, but the government may come after you at any moment to collect the debt. Therefore, before you even think of declaring bankruptcy on your loan, you should seek the guidance of either the company that services your loan or a lawyer who specializes in the area of student loan debt.

What to Consider Before Obtaining a PLUS Loan

Direct PLUS Loans are often included in a student's financial assistance package. However, adding the Direct PLUS loan to the package might make it difficult for families to understand the full cost of education. The school may claim that it wishes to inform families of all of their potential financial alternatives. Get a summary of your financial assistance package without the PLUS loan before you commit to a college.

To pay any remaining expenses after subtracting the value of grants, work-study, government student loans, scholarship programs, and other forms of financial help, you may want to consider a personal student loan rather than a Direct PLUS loan for your kid. You may pay back the personal loan while your kid is still in school if you wish to support them financially. Therefore, you may help offset your child's higher education expenses without taking on all of the financial burdens alone.

How to Handle a PLUS Loan

If you're struggling to repay a Direct PLUS loan for your kid's education, consolidation may help. If you extend the term of the loan, your monthly bills will naturally reduce, but you should be conscious that you will end up paying more in total. Another option is to refinance the PLUS loan. If you are able to refinance your loan, you may be able to cut your rate of interest & monthly payment, which makes it worthwhile to do so even if you are not currently having trouble making your payments.

It would be prudent to pay off as much of the debt as possible before retirement, even if doing so requires cutting down on other expenses. Try not to tap into retirement accounts like 401(k)s for the loan payments either by taking out a loan against them or withdrawing the assets prematurely. Alternatively, if you are about to retire soon and still have debt to pay off, you might think about keeping your current job for a few more years.

The Conclusion

It's a good deed to assist your kid with college expenses, but not at the expense of your financial stability or retirement. Your kid will have years to pay off loans before retirement, and their debts—unlike parent PLUS loans—may be good enough to qualify for loan forgiveness schemes and much more flexible income-driven payback programs.