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Why the Parent Plus Loan is not recommended by Financial Advisors
Financial Advisors who have not been informed about of all the complexities in the Parent Plus Loan program have hesitated to recommend it as a way to pay for college. There are three important reasons for their reluctance:
- 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 is viewed as very irresponsible.
- A loan at over 7% interest with a 4.3% origination fee is certainly not a very good deal.
Why the Parent Plus Loan can be a very smart loan for some families
There are some little-known provisions that have been created by policy makers which allow some borrowers to pay back only a very small portion of their Parent Plus loans. Some families will never have to make a single payment.
How does this work?
Since July 1, 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 as little as ten years under the Public Service Loan Forgiveness program (PSLF) and in twenty-five years for other families. Though you will be required to pay taxes on the amount forgiven after 25 years, the tax hit does not apply to forgiveness under PSLF.
Though some parents may be aware of ICR, here’s what 95% of parents don’t know— that’s how the government defines discretionary income. When all the kids are finally out of college, the closer you are to retirement, the more you may be able to benefit from these little-known exclusions:
The portion of income that is equal to the current federal poverty guideline is excluded to determine discretionary income
For a couple, this currently amounts to a $16,910 deduction from their Adjusted Gross Income
Untaxed income is also excluded
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.
You only need to include one parent’s discretionary income to determine your payments
This provision actually can get many families off the hook on ever paying back their Parent Plus loans. However, this must be the same parent who signed for the Parent Plus Loan.
The loan can be discharged because of death or permanent disability
The loan is discharged if the parent signing for the loan dies or is permanently disabled. As of January 1, 2019, there is also no tax that has to be paid on the amount discharged.
A Word of Warning
Don’t run out and get a Parent Plus Loan without having a consultation with one of our financial advisors or without doing your own due diligence. 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 from the time of your first disbursement, the rules may change by the time you need to borrow again for your kids who are going to college down the road.
Finally, since mistakes can be very expensive, we recommend that parents planning on borrowing $100,000 or more consider working with a Federal Loan Consultant that will help them through the entire process.
Clients, considering using the Parent Plus Loan to pay for college, should contact their Client Service Manager for further discussion