Parent Plus loans can become debt traps for parents nearing retirement

Son just out of college transitions smoothly into a new career, while you head for retirement which is just a couple of years away, but as retirement draws near there is a discomforting feeling that thousands of dollars in education debt are owed by you. This, unfortunately, is the reality for many parents that availed Parent Plus loans to boost their wards’ career prospects.

By the year 2012, a considerable sum aggregating $10 billion was approved as parent Plus loans to indigent families that found it difficult to manage college expenses from their own resources. For parents at the receiving end, it seemed the right choice as it was deemed a small but justifiable sacrifice to make so that the younger generation could start life on a firmer footing. Unfortunately, as statistics would reveal, parents could well have compromised the integrity of their retirement savings, placing their own future in jeopardy.

Schools play hooky by adding Parent Plus to funding options, thereby adding pressure on parents to sign the dotted line

In most cases, one can be pretty sure that the financial package that parents are shown will also include Parents Plus as part and parcel of the package. This way, there is an element of compulsion on parents to accept the loans without much time to probe the loan’s desirability and affordability. Many parents, in the heat of the moment, agree blindly, unaware of the consequences. The only way out is to specifically request the college authorities to bifurcate the financial aid, pointing out what is available and what needs to be sourced from one’s own money. Besides you need to inform yourself completely regarding every aspect of aid before you decide on the necessity of Parent Plus.

If the additional costs are outside the boundaries of parental affordability, the best solution is to gravitate to private funding, once financial aid and federal funded loans are exhausted. The moot point will be that private loans will continue to remain in the name of the child, and the child will himself be responsible for future repayment. Of course, to help your ward you can take over loan payments till the course is completed or help fill in the shortfall in expenditure that crops up in the interim. That way you would do everything possible to foot the bills, but you will not be legally bound to continue making future payments.

Parent Plus loans are denied grace periods for repayment

In the typical student loan, the balance outstanding is repayable starting six months after termination of the course, but such a grace period is not available under the Parent Plus loan, which becomes repayable immediately on completion of the course.
This raises a question mark on parental commitments to funding their own retirement plans. Besides, in the long run there are several protections extended to students that are not in a position to afford repayments, but one does not see such concessions extended to Parent Plus loans. Hence, the need for parents to be a bit warier of taking on long term liabilities that conflict with retirement funding obligations.

The federal student loan extends loan forgiveness, loan forbearance and loan cancellation incentives in special circumstances. Such programs are not available in Parental loans, and they also do not qualify for pay-as-you-earn or any other income linked repayment incentives.

There would be a tendency to borrow more through Parent Plus loans than necessary

The problem in assessing eligibility for the Parent Plus loan is that parental income may be judged, but past financial records of indebtedness may be overlooked, unless the credit score is totally adverse. So the lender may remain oblivious of whether the parent is actually capable of repaying the loan within the time frame suggested. The end result is that you could be approved a higher loan ceiling that may actually be beyond the boundaries of affordability.

The second factor is that once the loan is approved the school largely inflates the cost ceiling taking into consideration miscellaneous expenses like living and transportation costs including costs of special projects which are largely indeterminate. This way, the parent ends up taking on a higher liability than is actually warranted. Therefore, the onus is on the parent to determine whether he can truly afford the additional burden of the Parent Plus loan.

Loan default plays out serious consequences

It pays to realize that there is no forbearance or forgiveness as far as the Parent Plus loan default is considered. One cannot take refuge in bankruptcy to stall repayment. Default exposes you to a host of legal actions such as government collection and enforcement, and wage garnishment, tax refund offsets and worst of the lot, social security offsets. Parents need to get in touch immediately with the lender or take help from specialized student loan attorneys, if they fear they may be moving irrevocably into a default situation.

Tackling Parent Plus loan repayment

There are lenders willing to refinance Parent Plus loans that are in default, but this needs a good amount of research to zero in on lower interest rates and easier repayment options. One option to reduce monthly repayment burden is to go for longer repayment tenures, some extending up to 25 years. This option reduces the financial burden and helps parents live up to other financial commitments. But it would be prudent to be aware that extending loan tenure places a higher repayment burden by way of interest on you.
If you have heard of the proverb “prevention is better than cure,” you would be better served by attempting to aggressively liquidate student loan dues as soon as it is financially possible, even as your higher income keeps you afloat, and see to it that the loan doesn’t get carried over to your twilight years. This could mean more sacrifices in the short term, but the pain will definitely produce its gain. If retirement has materialized, do not be tempted to draw money from the retirement fund to pay off the debt in totality, as that would be a mistake you could regret for your remaining days. Instead, consider working on for a few more years so you create additional income to accelerate repayment.

The Bottom Line

You could be convincing yourself that you have bought the child into this world, and you are duty bound to help him in every way possible to become strong and financially independent, but wise counsel would suggest that nobility of thought should not be at the cost of jeopardizing one’s own retirement funding. Practically, one must weigh the pros on cons of student loans and be aware that children have decades ahead of them to earn their livelihood and repay their liabilities, and there are strong government initiated forbearance and forgiveness programs that help them when they falter. Therefore, as far as the parent is concerned, any decision on Parent Plus funding has to be decided on the touchstone of affordability, repaybility and financial stability, none of which is open to compromise for the parent.

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