How Much Parent Loan Debt Is Too Much Debt

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Ben Luthi

By Ben Luthi

January 2, 2019

As a parent, you’ll do anything to help your child realize their dreams. And for many parents, that includes taking out loans to put their children through college.

But, with retirement on the horizon, it’s essential for parents to consider how taking out parent loans can affect their ability to retire on time and with as little debt as possible.

As a result, it’s important to understand how much parent loan debt is too much, and what you can do if you borrow more than you can afford to repay.

What are the Limits for Parent Loans?

College students are limited in how much they can borrow each year with federal student loans. But with Federal Parent PLUS loans, you can borrow up to the cost of attendance minus any other financial aid your child has received. The Parent PLUS loan also does not have any aggregate loan limits. These potentially unlimited loan limits put parents at a greater risk of taking on too much debt.

With private student loans, the limit can vary based on the lender, but it’s generally the same whether you’re a student or a parent.

How Much Debt Is Too Much?

As long as your total parent loan debt for all of your children doesn’t exceed your annual income, you should be able to repay the loans in 10 years or less. If you borrow more than that with federal loans, your monthly payment on the Standard Repayment Plan may be too much to handle.

It’s also important to consider how much time you have until your planned retirement. If, for instance, you plan to retire in five years, it’s best to limit your parent loan debt to half of your annual income to ensure that you can pay off the debt before you leave the workforce.

That said, be sure also to take your other debts into consideration. If repaying parent loans would make it difficult to pay off your mortgage or car loans before you retire, it may be better to focus on those and limit your parent loan debt.  

What If You Borrow Too Much Parent Loan Debt?

If you retire before you pay off your parent loan debt or the 10-year Standard Repayment Plan payment is too high, it may be worth considering switching to a different repayment plan, such as an income-contingent repayment plan or an extended payment plan. This can reduce the impact of the loan payments on your cash flow.

See also: Complete Guide to Parent Loans 

Income-Contingent Repayment Plan

The income-contingent repayment (ICR) plan is the only income-driven repayment plan available for Parent PLUS loans.

To qualify for ICR, the loans must have entered repayment on or after July 1, 2006 and you’ll need to consolidate your loans through the Federal Direct Loan Consolidation program. The repayment term is extended to 25 years, and your monthly payment will be capped at 20% of your discretionary income, which is the difference between your income and 100% of the poverty line for your state of residence and family size.

Because of that cap, your payment can be very low, even zero, especially if your only retirement income is Social Security. If you don’t pay off the loan in full before the 25 years are up, the remaining balance will be forgiven. Keep in mind, though, that the forgiven amount will be considered taxable income.

Another thing to note is that all federal parent loans and about half of private loans are canceled upon the death of the borrower. Because of the Tax Cuts and Jobs Act of 2017, such canceled debts will not be considered taxable income to your estate through 2025.

Extended Repayment Plan

An extended repayment plan doesn’t base your monthly payment on your income, but your monthly payment will typically be much lower than it would be on a 10-year repayment plan. Your term can be extended up to 30 years, and you’ll typically pay a fixed or graduated amount each month over that time. Extended repayment can cut the monthly payment almost in half, depending on the repayment term.

While there won’t be anything left over at the end of the repayment plan to forgive, the same cancellation rule applies if you die before you finish paying the debt.


If You Have Private Parent Loans

If your parent loans came from private lenders instead of the U.S. Department of Education, you’ll be much more limited in your repayment options. Most private loans do not offer income-driven repayment plans. Also, not all private lenders cancel parent loan debt when you die.

That said, if your monthly payment is too high, you may be able to refinance your loans with a new private lender and request a longer repayment term, which can lower your monthly payment.

Keep in mind refinancing federal student loans means a loss in many benefits – income-driven repayment plans, any federal forgiveness programs, generous deferment options, and more.

Consider the Trade-Offs

If helping your children with education costs is important to you, parent loans can help you achieve that goal. But it’s important to consider that doing so could have an impact on your retirement cash flow and potentially even delay your exit from the workforce.

As you decide how much to borrow, consider these trade-offs and how they can affect you and your children in the future.


A good place to start:

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