There’s a disturbing new trend on the college loan borrowing front, and it’s parents and not students who are negatively impacted.
The data over the past several years shows that parents who help pay for their children’s college costs are increasingly doing so by borrowing instead of saving. Specifically, parents are turning to high-interest rate, no-limit Federal Parent PLUS loans to full the funding gaps for their children’s college costs.
This comes at a time when actual student loan borrowing for students in Bachelor’s degree programs remains relatively stable, perhaps because students are reaching their federal loan limits.
According to data from the latest National Postsecondary Student Aid Study (NPSAS), a study conducted every four years by the National Center for Education Statistics at the U.S. Department of Education, cumulative Federal Parent PLUS loan debt grew from $27,352 in 2011-12 to $32,596 in 2015-16. That’s a 19.2% increase over the same time span.
The College Board offers similar numbers.
According to the College Board’s Trends in Student Aid 2017, the number of parents taking out Federal Parent PLUS loans in 2016-17 was just 12% of the number of undergraduate students taking out federal direct loans (subsidized and unsubsidized.)
That said, the average parent college loan was approximately 2.4 times higher than the average undergraduate student loan. “Parents who took Parent PLUS loans borrowed an average of 44% more in 2016-17 than in 2001-02,” the College Board stated. “Average undergraduate student borrowing rose by 7% over these years.”
Higher Risk for Parents in Taking on College Loans
Mom and dad may not realize it, but Parent Plus Loans are structured differently than traditional student loans.
By and large, interest rates are higher than on student loans. Federal Parent PLUS loan interest rates are 2.55 percentage points higher than the interest rates on Federal Direct Stafford loans for undergraduate students. There are also higher borrowing ceilings on the amount of money you can take out with a Parent PLUS Loan, which is capped at the cost of attendance at your child’s school, minus any financial assistance.
Additionally, loan repayment options are narrower than for regular federal student loans, adding another layer of challenges to taking out Parent PLUS loans.
Take These Steps to Avoid Taking Out Parent Plus Loans
The good news? You can curb the financial risk of Federal Parent PLUS loans, and not have to take out a loan at all, if you deploy the following college financing strategies:
Max out on your child’s federal student loan limits. There’s no law that says you can’t help repay your child’s college student loans, and you can do that more easily by maxing out on your child’s federal college loan limit.
As noted above, interest rates are lower on federal student loans. That alone makes maxing out student loans before indulging in parent loans a great idea.
Loan limits for dependent students in their first year at college are $5,500.
The maximum loan amount goes up during your student’s remaining years at school, increasing to $7,500 during their senior year in college.
Take extra care in filling out your child’s FAFSA. Your student’s Free Application for Federal Student Aid (FAFSA) can get you more college funding than you might think, so make sure to fill it out every year, and fill it out correctly. You can find the form at fafsa.gov.
Make sure to fill out the “student demographics” section thoroughly and accurately, and do the same with the student dependency status questions and the parent demographic sections, as well.
Also, use the IRS data retrieval tool to transfer your income and tax information from your federal income tax returns to the FAFSA. Accurately recording your personal financial situation on the FAFSA gives you a leg up on getting more federal funding for college.
Consider a private student loan or private parent loan. All things being equal, federal student loans are superior to private college loans, as they come with lower interest rates, higher availability, and more flexible repayment options.
But pair up private student loans with Federal Parent PLUS Loans and the picture is different – and sometimes in the favor of private loans.
If the parents have excellent credit, they may be able to qualify for a private student loan or private parent loan with a lower interest rate than on the Federal Parent PLUS loan, and with no loan fees.
The Federal Parent PLUS loan charges more than 4% in fees. That is the equivalent of an additional percentage point in the interest rate over a 10-year repayment term, when compared with a no-fee loan.
Interest rates on variable rate private loans may be even lower, which is a good option if you are planning on paying off the debt before interest rates rise too much.
On the other hand, Federal Parent PLUS loans have better benefits than private loans. You lose the advantages of federal loans if you borrow private.
Get moving on a 529 college savings plan as soon as possible. Why borrow money when there are so many financial advantages from using a college 529 plan? It is cheaper to save than to borrow.
Literally, every day you don’t use a 529 plan means you’re leaving college funding money on the table. With a 529 plan, you don’t have to pay taxes on cash earned in the account, as long as the money is used for legitimate college costs.
If you launch a 529 plan when your child is born, the plan should help cover approximately one-third of college costs. But if you procrastinate in starting a 529 plan when your child reaches high school age, that funding contribution level falls to just 10%.
Still, it’s never too late to start saving for college. Every dollar you save is a dollar less you’ll have to borrow.
That should be all you need to open your own college 529 plan for your child.
Organize with other parents and lobby Congress. This move isn’t as far-fetched as you might think – not when Congress is as open as it’s ever been to raising federal student loan borrowing limits.
Here are the facts. The cumulative federal student loan borrowing limit has been stuck on $31,000 since 2008.
There is a movement in Washington D.C. to up that amount to $39,000, as part of a newly-revamped Higher Education Act of 1965, which is overdue for an update.
Along with simplifying the FAFSA and eliminating origination fees on federal student loans, there is broad bipartisan support for hiking the federal student loan borrowing limit to $39,000.
A call to your congressperson and senator – along with calls from other organized parents – may spur congress to act and raise the student loan borrowing ceiling. A higher student loan limit will reduce the need for parents to borrow on behalf of their children.
A Call to Action for Loan-Burdened Parents
There’s really no need to stack up onerous college loan debt in the form of Parent PLUS loans.
Instead, deploy the action items listed above and take some financial pressure off yourself, while guaranteeing your son or daughter can still learn and enjoy their time at college – for this year and beyond.