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Parent Plus Loans: What You Need to Know

parent plus loan forgiveness

This article is slated to be updated with the latest FAFSA, Scholarship, and Financial Information. For more updated information, please refer to our 2023 and 2024 articles.

As the cost of higher education continues to soar, families often find themselves grappling with the daunting task of financing their children’s college dreams.

Enter the Parent PLUS Loan, a federal student loan program designed to bridge the gap between financial aid and the full cost of attendance. While this option may seem like a lifeline, financial advisors have raised concerns about its potential pitfalls, urging caution and careful consideration before taking on this debt.

The Parent PLUS Loan: A Closer Look

The Parent PLUS Loan is a federal student loan program that allows eligible parents to borrow funds to cover the remaining costs of their dependent undergraduate student’s education after exhausting other forms of financial aid.

Unlike other federal student loans, the Parent PLUS Loan requires a credit history check but does not consider the borrower’s income, assets, or income-to-debt ratio – a practice that has raised eyebrows among financial advisors.

So, naturally, financial advisors who have not been informed about all the complexities of 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.

Additionally, the lack of underwriting standards, allowing borrowers with subpar credit scores to take on substantial debt, has been viewed as irresponsible lending practices by some experts.

But, there might be a silver lining to all of this. Let’s take a look.

The Hidden Gems: Income-Contingent Repayment and Loan Forgiveness

Despite these concerns, the Parent PLUS Loan program offers some lesser-known provisions that can make it a strategic choice for certain families. These provisions were created by policy makers to 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.

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.

Untaxed income is also excluded. To put it simply, 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 also 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.

Finally, 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 Caution and the Importance of Professional Guidance

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! While these provisions may seem too good to be true, it’s important to remember that the rules governing federal student loans can change over time. Borrowers should exercise caution and seek professional guidance before taking on significant debt, as mistakes can be costly.

At My College Planning Team, we understand the complexities of the Parent PLUS Loan program and the potential impact it can have on a family’s financial future. Our financial advisors are well-versed in the intricacies of federal student loans, income-driven repayment plans, and loan forgiveness programs, ensuring that our clients make informed decisions tailored to their unique circumstances.

If you’re considering utilizing the Parent PLUS Loan to finance your child’s education, we strongly recommend scheduling a consultation with one of our experienced advisors. Together, we can navigate the complex landscape of college financing, explore all available options, and develop a comprehensive strategy that aligns with your family’s short-term and long-term financial goals.

Don’t let the complexities of college financing overwhelm you. Empower yourself with knowledge, seek expert guidance, and make informed decisions that pave the way for your child’s academic success without compromising your family’s financial well-being. Contact us today to schedule your free college planning session and take the first step toward a brighter future.

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Matt Grzetich received his BA in Organizational and Corporate Communications from Northern Illinois University. He has over 10 years of experience in Assisting families to understand the enrollment and financial aid process within Higher Education. His most recent experience has been Managing the Student Finance Operations team for a large proprietary University and specializes in: FAFSA, the appeals process, reviewing award letters and Title IV Funding options. Matt is passionate about helping families understand the financial aid process and navigate the most cost-efficient options to pay for college. He is also the father of two small children and volunteers his time within the school district.

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