Unbeknownst to many who are struggling to pay for college, the current loopholes in the Parent Plus Loan rules allow some families to receive full forgiveness on a boat load of college debt.
It’s not a viable strategy for everyone, it’s not a recommendation by any means, and there is quite a bit of controversy surrounding it, but there is a way to banish the bills from your Parent Plus Loan for good.
But should you?
Parent Plus Loans – What You Need to Know
There are two main reasons why so many financial aid advisors hesitate to recommend the Parent Plus Loan for college financing:
First, just about anyone can qualify. Unlike traditional loans, the government does not take in account your ability to pay back the loan (a glaring red flag). Typically, your loan officer would consider things like income, existing debt, and the ratio between the two to determine your risk factor. But with a Parent Plus Loan, that risk factor seemingly does not exist.
Second, a loan with over 6% interest and a 4.3% origination fee does not sound like a good idea to begin with.
What many financial advisors and most parents don’t know, however, is that the loopholes in current regulations have allowed some parents to get off the hook on paying back their Parent Plus Loans altogether.
Though the multiple loopholes associated with a Parent Plus Loan just isn’t good public policy, that didn’t stop our lawmakers from including provisions that allow certain borrowers to only pay back a small part and, in some cases, never make a single payment on the borrowed amount.
A visit to government websites will tell you that your Parent Plus Loan can be consolidated under the Federal Loan Consolidation Program and then paid back under the Income Contingency Program (ICR). Your loan will be fully forgiven in 25 years if you commit up to 20% of your “discretionary” income.
In addition, those saddled with a Parent Plus Loan could expect complete forgiveness within 10 years if they are making payments via ICR and work in a qualifying public sector or non-profit career.
The loopholes begin by how the government defines discretionary income. According to EdCentral.org, you can deduct the following expenses to determine your discretionary income:
The amount of your income that is equal to the current federal poverty standard
For a couple, this comes out to a deduction of more than $15,000.
The untaxed portion of your income
Roth IRAs, untaxed social security benefits, the cash value of permanent life insurance policies, and other accounts where you’ve already paid taxes may give some families enough additional deductions to allow them to only pay a minimal monthly payment on their consolidated Parent Plus Loans.
Single Earner Wages
This is where things get really interesting. You only need to include one person’s income on your AGI – the person who signed for the Parent Plus Loan. Accordingly, if the parent signing the loan is only working part time, it is possible for a family making a six-figure income will have zero payments over 25 years, after which the loan is forgiven.
There is one caveat worth mentioning here: You must file taxes as “married filing separately”, beginning in the year prior to beginning your payments.
So why is this being kept under wraps?
Isn’t it obvious?
The less you have to pay back, the less profit someone else stands to make.
The companies contracted by the government to service these loans are not telling parents about their forgiveness options if they are unable to repay. And why should they? There isn’t any profit in it for them if they share this information.
But here’s the real clincher as to why you probably haven’t heard this information before:
The provisions of the program could change at any time, which leaves much uncertainty on the table. And that could leave you financially vulnerable, especially if you never had any intention of paying back your loan to begin with.
At first glance, it sounds like the end-all solution to financial woes and a brighter future. But, as just mentioned, the tactic carries an unreliable dark side that, for many, overshadows any real benefit.
However, it’s up to each individual to determine what is best for their unique situation, and it starts with learning the facts. All of them.
The Failures of Public Service Loan Forgiveness
If you need more convincing about the risk in betting on loan forgiveness, the current lawsuit against a major player in the student loan field might enlighten you.
First of all, where should a loan company draw the line between being profitable and being responsible to those they service? Should such a line exist?
Millions of borrowers think so, which is why Navient, one of the biggest servicing company for government loans, has found itself in a midst of a major legal battle regarding its inability to educate its consumers on repayment options.
With a class of over 12 million borrowers with $300 million in debt in the states of Washington and Illinois, Navient is facing a bloody battle because of their supposed lack of working with people to repay the money they borrowed.
This particular legal circus states that borrowers may have shelled out an unnecessary $4 million in interest because Navient allegedly failed to mention any additional repayment options. (This is where that line of profit-versus-responsibility could be better defined.)
Instead, Navient guided those struggling to keep up their payments to forbearance, which means borrowers could temporarily halt their payments. The downside is that while those payments are at a standstill, the interest accumulation is not. Which means – you guessed it – Navient stands to make EVEN MORE MONEY from people already suffocating under the weight of their student loans.
Navient has gone on to say that it is not a reasonable expectation for them to act in the best interest of the accounts they service.
“There is no expectation that the servicer will act in the interest of the consumer,” Navient said in a motion to dismiss the case the U.S. Consumer Financial Protection Bureau filed.
Secondly, this type of scenario makes you wonder why companies like Navient are not under any legal obligation to set forth the truth, the whole truth, and nothing but the truth when it comes to repayment options. The reason, of course remains unclear.
People don’t know what they don’t know, and may only get answers if they know the questions to ask in the first place.
Is Loan Forgiveness a Real Possibility?
The disdain for the loan servicing companies not sharing this insider information, good and bad, isn’t the only place to point a finger. Rather, the uncertainty looming in the Department of Education is also culpable of pulling some seemingly deceptive strings.
Just look at the how the government has been reneging on student loan forgiveness criteria. The PSLF that was put in place by the Bush administration in 2007 stated that loans for those in public-sector careers would be forgiven within 10 years. Now, however, it appears the Department of Education is redefining its terms as more people are beginning to discover and take advantage of forgiveness loopholes.
A recent legal filing details that the more than half a million people enrolled in a federal program with the hopes of achieving loan forgiveness – provided they work for 10 years in a public service role – may never see their loan debts waived.
The legal report says that the Department of Education proclaimed that borrowers could not rely on the federal program administrator’s word as to whether or not a loan could qualify for forgiveness, despite the thousands of approval letters sent by the administrator, FedLoan Servicing. These letters are considered non-binding and can be rescinded at any time. In addition, the decision is retroactive, meaning those who were working in eligible positions that no longer meet the requirements will not receive credit for their time already served in that position.
Interestingly, this situation arises just as the first potential beneficiaries are to reap their forgiveness rewards, ten years after the program was first enacted. Some who were in jobs that initially qualified for the program have now experienced a decision reversal that dropped their eligibility with no means to appeal. The purpose of the lawsuit surrounding these instances is to re-reverse the decision to reinstate those positions to its original categorization within the program. MCPT will be watching this carefully over the coming months and report back to our readers on any important developments.
It’s unnerving to know that these approvals, ones that many graduates stake the beginnings of the rest of their lives on, can be reversed at any point in time, without notice or explanation.
To date, no debt has been alleviated since the program began in 2007 and the minimum terms require 10 years of service. But as we continue to creep up on the impending loan relief for the first lucky batch of borrowers, it remains unclear just how many of them will actually see their debts disappear.
Why No Changes Are Expected in Parent Plus Loan Forgiveness Under the Current Administration
It should be noted that, although loan forgiveness was the brainchild formed under the Bush administration, the two subsequent administrations since then have had opportunities to make adjustments. But those adjustments more than likely don’t entail eliminating forgiveness with Parent Plus Loans.
The Obama administration tried and failed in its attempt to strengthen the underwriting requirements of Parent Plus Loans in 2012, making it more difficult to receive the education funds. The imposed new requirements impacted credit requirements of borrowers, and subsequently interrupted the education of 28,000 HBCU (Historically Black Colleges and Universities) students and caused over 400,000 parents to be rejected for the loans they needed to pay for college.
These parents depend on the parent plus loans and the colleges also depend on the revenue from them to stay in business. As a result, HBCUs lost a collective $150 million in funds. And in 2015, two HBCU campuses, St. Paul’s College in VA and Morris Brown College in GA, had to close their doors for good.
Just three weeks after the inauguration, the Trump administration met with the presidents of HBCUs and has promised his support to them. This would seem to preclude that there will not be any changes in the current underwriting requirements or forgiveness provisions.
At least, for now.
“The President has a strong commitment to them [HBCUs] and understands that over the last eight years they’ve been woefully neglected and I think he really wants to show a commitment in funding to HBCUs. You’ll see not just a push this month, but in his budget and going forward.” –Sean Spicer, White House Press Secretary
While the Trump administration may not foresee any changes to Parent Plus Loans, that does not clear the way for a foolproof forgiveness solution. If Trump fails to secure a second term, the new incoming administration might induce changes to the program that can demolish any chance of debt forgiveness.
The bottom line is this: Parent Plus Loan forgiveness is a gamble, plain and simple. Just because there is a possibility of having your student debt vanquished 10 or 25 years later does not mean that it is guaranteed to drop off your record.
As noted in the lawsuit against Navient and the current situation surrounding the eligibility reversals, forgiveness requirements are not set in stone. Rather, the Department of Education has explicitly stated that even a FedLoan letter of approval is not reflective of the final decision on the borrower’s qualifications.
Knowing everything you know now about Parent Student Loan Forgiveness, you still should not blindly assume that you can now borrow all you need for college and get forgiveness for it 10 years later with PSLF (25 years later if the parent is not working for a non-profit).
Truth be told, the possibilities sound nothing short of miraculous and enticing. But don’t let the content of this article propel your decision in either direction. There’s more to know and understand than a single blog post can convey, and by all means, you should seek out more information if you are even slightly considering the strategy’s viability for yourself.
The best decision is to speak with an MCPT advisor before embracing the strategy mentioned above. They can help you navigate this volatile process and help you avoid potential landmines in the process. One misstep on your part and you could get booted from the program by your loan service provider with no recourse to re-enter.
It might all just be too good to be true. Take caution.