We’ve all heard retirement money to help you out, but what about parent education loans to help your child out? What if I told you the federal PLUS loan program allowed you to borrow just the amount you needed to see your child off to college? But here’s the catch- you can borrow this money, but it’s nearly impossible to pay off. The good thing about this program, though, is that it allows students and parents to take out loans that will cover the full amount of their education, there are no qualifications such as income, credit, or background check.
Democratic president hopeful Martin O’Malley says he and his wife have borrowed up to $339,200 for the education of their four children. Scott Walker, a Republican presidential candidate says he has borrowed between $10,000 and $12,000 for his two college student son. These amount are high above the amounts a majority of parents borrow.
Small amounts of loans, however, are even difficult for some parents to pay off, especially those who are receiving or eligible for a Pell Grant, a grant for students who are in poverty with a household income of $50,000 or less. A study conducted by Mark Kantrowitz, a financial aid expert, shows that the monthly PLUS loan payments average to be 38% of that month’s income for those who receive the lowest 10% in income.
On Social Security disability, the average amount of money received is $14,000 with a maximum of a little less than $32,000. Even with this income level, one mother took out $45,000 for her child.
Surprisingly, the rate of parents who default their parent PLUS loans are rising above the amount of students who default their student loans; the rate of parents taking out these loans has almost tripled within the last four years.
REPAYMENT PLANS
Thanks to the Obama administration, there has been an expansion in income-based programs for repayment for students. These programs typically reduce the payments to 10% or less of their income. For those who have the lowest income, repayment is not necessary and the debt will be forgiven after 10 years in public service jobs and 20 years if not with a public service job.
For parents, it’s a different story. No such program exists for parents borrowers. On top of that, parents PLUS loans are very hard to get rid of in bankruptcy and the government is eager to collect their debt through various methods such as stopping tax refunds, and taking a percentage of their Social Security checks.
Kantrowitz says that within 10 years, those parents who borrowed less money than their annual income can pay off their debt. For those parents who are five years into retirement, their debt for education should be half of their income.
However, none of this means one would be smart in carrying around that much debt. College graduates who earn a higher income as a result to their schooling will benefit whereas parents do not have those such benefits. Also, parents who don’t have many more years to work off their debt will not be able to comfortably retire with the great debt weight on their shoulders.
Mark Kantrowitz has said, “I would never recommend parents borrow six-figure debt for their children, even if they can afford to repay the debt … Parents don’t always make the smartest financial decisions.”