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1001 Ogden Ave.
Suite 203
Downers Grove, IL

Financial Consultants
1717 North Naper Blvd
Suite 200
Naperville, IL

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Parent Plus Loan: What You Really Need to Know

ParentPlusLoanFinancial advisors with My College Planning Team hesitate to recommend that clients take a Parent Plus Loan to pay for college.   There are two important reasons for our reluctance:

The Government does not consider the borrower’s ability to pay back the loan

Although some might think it’s unpatriotic to suggest that our own government is engaging in predatory lending practices, consider this:
  •     A loan given without any consideration given to income, assets, or income-to-debt ratio is going to hurt a lot of families.  Even the worst of our subprime lenders prior to the 2008 crash set higher standards in their lending practices.
  •     A lender who allows a borrower with a sub-par credit score to borrow up to the full cost of attendance for college these days would also be seen as very irresponsible.
  •     A loan at over 7% interest with a 4.3% origination fee is certainly  not a very good deal.

The Parent Plus Loan, with its multiple loopholes, is bad public policy

There are some little-known provisions created by our policy makers in the current administration that allow some borrowers to pay back only a very small portion of their Parent Plus loans. Some especially savvy families won’t have to make a single payment.

Since 2006 Parent Plus Loans, if consolidated, can be paid back under the Income Contingency Repayment program (ICR).  This requires payments of up to 20% of “discretionary” income with the loan completely forgiven in twenty-five years. If you check out all the government websites, that’s likely all you’re going to learn about the loop-holes in Parent Plus Loan.

Here’s what 95% of parents don’t know—how the government defines “discretionary” income.  When all the kids are finally out of college, the closer you are to retirement, the more you need to be aware of these provisions. According to EdCentral.org the government allows you to deduct the following items from your income to determine your “discretionary” income:

The portion of income that is equal to the current federal poverty guideline

For a couple, this currently amounts to more than a $15,000 deduction from their AGI.

The untaxed portion of income

Families with Roth IRAs, untaxed social security benefits, cash value in permanent life insurance, and other accounts in which tax has already been paid, will  have to pay very little back on their consolidated Parent Plus Loans.

Your AGI needs to include only one parent’s income

If the first two loopholes are not enough to get you off the hook on ever paying back your Parent Plus loans, this latest provision, thanks to the current administration, can certainly help you. You now only have to include one parent’s income–the one who signed for the Parent Plus Loan.

Why is the word not getting out about all of these provisions?

That’s the million-dollar question.  It would seem to me that policy makers, knowing how so many families are getting in trouble paying back these  loans are trying to provide some relief on the back-end. But what good is all that relief if no one knows about it?

A recent article written by New America Foundation , addresses this question.  Their answer: Our policy makers under our current administration are really hoping you don’t know the rules!

A Warning

Don’t run out and get a Parent Plus Loan without having a consultation with one of our financial advisors.  Even though the government may not care about your income-to-debt ratio, other creditors do care about it.  Taking out a Parent Plus Loan will still affect that ratio and, in turn, affect your credit rating.

Also remember that the rules can change.  Even though you may be grandfathered in under the current rules, each year you are required to apply for a new loan.

Finally, many rules governing student and parent loans have only been implemented through executive action and can be changed or eliminated under a new administration.

As always…buyer beware!

 

 

 

Jack Schacht

Jack Schacht has over 40 years in marketing, management, career development and business leadership. As president of College Funding Advisors and co-founder of My College Planning Team, he brings his unique talents to help families identify and implement strategies that can help them substantially reduce college costs.

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