When to take out a Parent PLUS loan is a very bad idea

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Chances are you love your kids. And when these kids want to graduate from college, you’ll likely be looking for ways to make it easier for them.

You may even want to take out a Parent PLUS Loan to help cover the costs. And while that can help, there are some circumstances that make taking out a loan a really horrible idea.

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The appeal of Parent PLUS loans

In an attempt to bear the financial burden of their children’s higher education, parents often take out a Parent PLUS loan. A Parent PLUS Loan is a federal student loan offered by the US Department of Education and granted to parents of dependent undergraduate students.

The appeal is the ability to borrow enough to cover the difference between the estimated cost of raising your child and any financial assistance he receives.

Whether your child offers to help them pay off the loan after graduation or you plan to cover it yourself, a Parent PLUS loan is legally yours. Payment is your monthly responsibility, appears on your credit report, and can impact your finances for years to come.

The tricky balance at this point is figuring out how to help your child without hurting yourself.

You may want to reconsider a Parent PLUS loan if any of the following apply:

You have bad credit

You will not be eligible for a loan if you have one or more debts with a combined balance of more than $ 2,085 that have been

  • placed in the collections,
  • debited within the previous two years, or
  • paid 90 days or more late.

Also, there can be no garnishment, repossession, tax lien, or wage garnishment on your credit report in the past five years.

You need an endorser to qualify

An endorser is like a co-signer – that person will be responsible for repaying the loan if you don’t. If you need someone to co-sign a student loan, you should seriously consider the wisdom of taking on new debt.

Your child seems uncertain

If your son or daughter seems reluctant to go to college or has a habit of giving up his or her activities when the going gets tough, think twice before taking out a loan.

Remember: this loan must be repaid whether or not your child stays in school.

You have trouble paying your bills

If you are already stealing from Peter to pay Paul, now is not a good time to take out another loan. Unlike a regular federal student loan, the Parent PLUS loan is not eligible for income-based repayment plans. This means that your monthly payment will stay the same for the life of your loan and that late payments will not be canceled if you run into financial problems.

In addition, the Parent PLUS Loan requires you to pay origination fees. For loans disbursed between October 1, 2019 and October 1, 2020, these fees are 4.236%. It is automatically deducted from the amount borrowed.

You are not ready to make payments right away

Unlike your child, who can usually delay loan repayment for six months after graduation, you need to start making payments on a Parent PLUS loan right after the loan is paid off.

While it is possible to request a deferral while your child is in school, interest will continue to accrue while payments are suspended.

You are far from ready for retirement

Your child has decades to work after graduation, which is enough to repay their student loans if they manage the debt properly.

On the other hand, you have less time to prepare for your retirement. If taking out a Parent PLUS loan takes money away from your retirement account, think twice before you shorten your future.

Remember: you are not alone

A new study from Discover Student Loans found that a growing number of parents expect their children to help them pay for more of their higher education. Only 28% plan to cover the entire cost.

The survey also found that 65% of parents are concerned about having enough money to help. Given that the average cost of tuition increased by almost 260% between 1980 and 2014, it makes sense that parents wonder what they can do.

Why not find other ways to help? Let your kids live at home while they go to college, keep them on your cell phone plan, cover their car insurance while they’re at school, and make it your mission to help them find and to apply for all scholarships and grants to which they are eligible.

Fortunately, parental support comes in many forms.

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