How to Avoid Parent PLUS Loan Pitfalls While Covering College Costs
Parent PLUS loans can help fund college but come with risks. Learn how to avoid financial pitfalls and borrow smartly.
Hello Discerning Parents and Future Graduates,
Today, we delve into another essential chapter in our guide to mastering the financial maze of funding higher education. For all the Jills and Jacks navigating the delicate balance of funding their children's education without jeopardizing their own retirement dreams, this one's for you.
What Are Parent PLUS Loans?
Parent PLUS loans are federal loans designed to help parents of dependent undergraduate students fill the gap between financial aid and the total cost of college. Here are some quick features to know:
Fixed Interest Rate: For Direct PLUS Loans first disbursed on or after July 1, 2024, and before July 1, 2025, the interest rate is 9.08%.
Origination Fee: 4.228%, deducted upfront.
Borrowing Cap: No limit beyond the cost of attendance minus other financial aid.
Why do parents choose them? They’re easy to qualify for (just a basic credit check), and they can cover expenses not addressed by other aid or scholarships.
The Biggest Pitfalls of Parent PLUS Loans
High Interest Rates and Fees
Federal PLUS loans often carry higher interest rates than other federal student loans.Example: Borrowing $50,000 could balloon to $70,000 after interest over 10+ years.
Lack of Income-Driven Repayment Options
Parent PLUS loans don’t offer income-driven repayment unless consolidated, leaving limited flexibility in tough financial times.Impact on Retirement Savings
Borrowing significant amounts can delay retirement savings, forcing some parents to dip into their retirement funds.No Automatic Forgiveness
Forgiveness options are limited to programs like Public Service Loan Forgiveness (PSLF) and require specific eligibility criteria.Over-Borrowing Temptation
The unlimited borrowing allowance can lead parents to overextend financially, potentially jeopardizing their financial future.
How to Avoid Parent PLUS Loan Traps
Step 1: Borrow Only What You Can Repay
Stick to a repayment amount that fits within 10% of your discretionary income post-retirement.
Use online calculators to project total repayment costs.
Step 2: Maximize Scholarships and Grants
Prioritize free money by encouraging your student to apply for scholarships regularly.
Step 3: Explore Federal Loan Options First
Exhaust federal student loans like Direct Subsidized and Unsubsidized Loans before borrowing via Parent PLUS.
Step 4: Make Interest-Only Payments While in School
Paying interest during the deferment period can prevent unnecessary compounding.
Step 5: Share the Responsibility with Your Student
Encourage part-time jobs or summer work to help your student contribute to expenses.
Step 6: Reassess Annually
Parent PLUS loans must be reapplied for each year. Use this as a chance to review your family’s financial plan.
Alternatives to Parent PLUS Loans
Parent-Owned 529 Plans:
These allow tax-free withdrawals for qualified education expenses.Private Student Loans:
If you or your student has excellent credit, private loans may offer lower interest rates.HELOC (Home Equity Line of Credit):
While potentially risky, this can be a lower-interest option for some families.Student Contributions:
Encourage your student to attend a lower-cost college for the first two years or work part-time during school.
The Emotional and Financial Boundaries
While every parent wants to help their child succeed, it’s important to set boundaries. Be realistic about what you can contribute without compromising your financial stability.
Plan Smartly, Borrow Wisely
Parent PLUS loans can bridge the gap in funding college, but they come with strings attached. By understanding the risks, exploring alternatives, and sticking to a strategic plan, you can help your student achieve their dreams while securing your financial future.
Have questions about funding college without risking retirement? Schedule a Getting Acquainted Call today to discuss your unique goals and create a tailored plan!
Warm regards,
Julie Bray
Your Family's College and Retirement Champion
GW Financial, Inc.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by GW Financial, Inc. to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2024 GW Financial, Inc.