Here at The Student Loan Sherpa we always recommend borrowing student loans from the federal government for the times student debt cannot be avoided. The interest rates leave much to be desired, but the forgiveness programs and repayment options are far better than anything on the private market. Plus, if you ever reach the point where you don’t need the federal perks and are more worried about interest rates, you can always refinance your federal loans.
One possible exception to this general rule of advice is Parent PLUS loans. These loans are still federal loans, and they still have many of the great federal perks, but they are not nearly as good as the other federal loans. There are also some major issues with Parent PLUS loans. As a result, they can be a good option in some circumstances, but in other cases they could be a huge mistake.
PRO: Parent PLUS loans are made to parents and have much higher limits.
The obvious thing that separates Parent PLUS loans from other federal loans is right in the title. Unlike all other government loans, these loans are made directly to the parent, and the student is not liable for repaying the loan. This means that if your child doesn’t have a credit score, loans can still be acquired. It is also an option for parents who want to pay for their child’s education, but lack the funds to do so entirely.
Due to the high borrowing limits, these loans are also often used to cover the remainder of the college costs when scholarships, grants, and other federal loans are exhausted.
CON: The Interest Rates
Parent PLUS loans have higher interest rates than any other federal loan. What makes this fact somewhat surprising is the relative risk. Normally interest rates go up or down according to how much risk there is with the loan. Risky loans have high interest rates and the loans that are more likely to get paid back have lower rates. One would expect money lent to parents, who already have jobs and a credit history, would be less risky than money lent to a recent high school grads. Unfortunately, the federal government treats these loans differently and by statute they have higher rates than those given to undergraduate and graduate student loans.
PRO: Repayment Options and Forgiveness
Parent PLUS loans are eligible for the Income Contingent Repayment Plan (ICR). The nice part about this repayment plan is that it is based upon the income of the borrower, not the total loan balance. For those borrowers who have an unexpected job loss, the ICR plan ensures that they can stay current with the loan. ICR requires that borrowers pay up to 20% of their discretionary income towards the loans.
Similarly, there are provisions to have the loans forgiven after 25 years of ICR payments and possibly even as soon as 10 years for public servants. Enrollment in these programs requires federal direct consolidation, but it can be accomplished with minimal effort.
CON: Repayment Limitations and Consolidation Confusion
A major downside to the Parent PLUS loans is that they are not eligible for the best income driven repayment plans. Where ICR requires 20% of a borrower’s monthly discretionary income, other plans require as little as 10%. This can make a huge difference in the monthly payment.
Another downside is that qualifying for some federal benefits, such as Public Service Student Loan Forgiveness, requires the Parent PLUS loan to be consolidated into a federal direct loan once it is in repayment. Not only is this extra step a headache, it can also result in some major mistakes. If a Parent PLUS loan is consolidated with other federal loans, the new large consolidated loan has the same limitations as the Parent PLUS loan. A mistake here can double the payments on many of the other federal student loans.
As a result of the current rules, many borrowers stand to gain a lot by federal consolidation, but if they include the wrong loans within the consolidation, they could be making a huge mistake. Worst of all, many of the federal loan servicers do not understand the implications of combining a Parent PLUS loan with other federal loans.
There are advantages to Parent PLUS loans, but there are some major drawbacks as well. The most important thing when it comes to dealing with these loans is understanding that they are different. Some of the general rules of federal loan management apply to these loans, but there are some major exceptions that cannot be ignored.