Plus-Sized Dreams
As I write this, there are 47 days to suffer through until the return of the NFL season. I suppose that also means that there are a similar number of days until the fall school semester starts, which makes this an appropriate time to talk about student loans.
Oh, but not just any student loan. Let’s talk about Parent Plus loans.
A Parent Plus loan is a federal loan taken out by the parent (duh) of a college student for their educational expenses. Why might this be necessary? The maximum amount that an undergraduate student can borrow (as a federal student loan) is $31,500 over four years. But the average all-in cost (tuition, room and board, books) of attending an out of state public university exceeds $190,000. For a private university, about $255,000.[1] Even with generous merit and/or needs-based aid, there’s likely to be a gap.
(Now, this is where many will chime in with helpful reminders that one need not attend a pricey school; In-State U has a perfectly viable football team. Or that going to community college for two years and then transferring can be a realistic option.)
The point is, for reasons valid or not, parents often find that there is a cavity between the amount that their preferred schooling option will cost, and what is readily available (from savings and regular student loans) to pay the bill. Many parents see this chasm and do not turn away; they use Parent Plus loans to build a bridge across. (The total outstanding amount of Parent Plus debt exceeds $100 billion.) But that’s harder than it used to be. Here’s why:
When a Parent Plus loan comes due, the only repayment option now is the new Tiered Standard Repayment Plan. Specifically, there is no longer an option to use an income-driven repayment plan for a Parent Plus loan. That loophole is now closed. This is a BFD for parents with large Parent Plus loan balances and not a large income. (It is an even bigger deal for parents who were planning to rely on Public Service Loan Forgiveness for repayment.)
There is also a new limit on how much a parent can borrow under the Parent Plus mechanism: $20,000 annually ($65,000 lifetime) per student.
What’s the alternative to a Parent Plus loan (aside from, you know, not choosing an unaffordable school)? Many parents will look to the private student loan market. Now I was deliberate in writing “parents will look” and not “students will look.” Because unlike a federal student loan, a private student loan lender will expect the borrower to have a proven way to pay back the loan. The upshot is that a private student loan will almost always require the parent to be a co-signer. And as I hope I do not have to remind you, co-signing a loan is no different than taking out the loan yourself.
Practically speaking, what’s my counsel?
Weigh the pros and cons of a Parent Plus loan versus a private student loan. If you have a high credit score, the interest rate of the private loan can be lower. Also, a Parent Plus loan comes with a 4.228% origination fee, raising its total cost.
On the other hand, even though an income-driven repayment plan is no longer an option, it is still a federal student loan. If you experience a hardship (loss of employment, for example), you can put payments on a temporary pause while you get back on your feet. If you (or the student for whom you borrowed) pass away, the debt is discharged. The sometimes higher cost of a Parent Plus loan buys you some “insurance,” so to speak.
Do not take on a Parent Plus loan with the expectation that your son or daughter will assume the payments on your behalf. They may very well agree to this plan with every honest, heartfelt intention of doing so. But life has a way of getting in the way. You must assume that you will be the person making the payments. Media abounds with stories of student debt ruining retirement aspirations, and it is often debt incurred on behalf of children.
Similarly, do not take any comfort in the fact that you are “only” a co-signer on a private student loan. See admonishment just above.
Don’t wait until graduation to begin repayment. Just because you can, doesn’t mean you should. Interest begins to accrue immediately upon disbursement.
Understand how the monthly loan repayment will impact your retirement savings plan. Run the numbers before you take on the debt. In fact, do this while your child is still a sophomore or junior in high school. It’s a lot easier to pivot to Plan B before the acceptance letters start to flow and emotional attachments to the dream school are formed.
If you must reduce your 401(k) or IRA contribution for several years in order to service the debt, how much will you have to later increase your savings rate to make up for lost time? Is that a realistic number? (Calculators like this can help.)
Will you plan to take the loan payment with you into retirement? If so, how will that affect your retirement lifestyle?
The math may be brutal, especially if you have multiple children that you are borrowing on behalf of.
Look, telling you to not take on a five-figure (or more) debt is pretty much low hanging fruit. You already know it’s not the best idea, but some of you are going to do it anyway. Hope springs eternal and perhaps it will all work out well for you. My job is to urge you to be prepared in case it doesn’t.
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[1] Source: MEFA (Massachusetts Educational Financing Authority)