College is expensive and finding ways to pay for tuition and associated costs can be difficult for many students, as well as their family members. When options are limited, sometimes parents resort to taking out loans themselves to help their children pay for the costs of a higher education. Recently, one such loan has been criticized, the Parent PLUS loan for its terms and conditions, and also the effect it has on the parents who sign on the dotted line, not fully knowing what they are agreeing to.
A study recently issued by New America reports that a higher percentage of low-income African American parents rely on the use of Parent PLUS loans more than low-income whites. The study recommends making the use of Parent PLUS loans off limits to any family of limited financial means and offering additional, and affordable federal loan options for lower income families.
Families often resort to the parent PLUS loans after their children have maxed out other federal loan options. Many of the features of Parent PLUS loans have given them the reputation of being a loan of “last resort.” The limits tend to be fairly generous, the underwriting limited and the interest rates high.
The repayment options that parents are given on these loans are very limited, which only increases the risk that the borrower parents will default on the loan obligation. By having parents take these loans out, creates a level of “intergenerational debt” that can be crippling.
An additional problem with Parent PLUS loans have been the fact that lenders have issued these loans without evaluating the borrower’s ability to repay them. Without properly qualifying the borrower, issuing the loan simply puts them in a situation where he or she ends up falling behind on payments.
These loans were originally intended for families with more financial resources and in higher income tax brackets whose children may not qualify for need-based aid. In fact, most of the PLUS borrowers are from families earning more than $75,000 annually, many of them coming from upper class, Caucasian families with only 10 percent of Caucasian families earning less than $30,000 taking out these loans. However, for African American families, one-third of these individuals who have ended up taking out a PLUS loan earn less than $30,000, which is the opposite of what the study found with Caucasian families in the same tax bracket.
Because of the high fees associated with these loans, repaying the Parent PLUS loans can be difficult. If the parent is already struggling to make monthly payments, few options exist for that parent when it comes to repayment options. Currently the only income-based payment plan is an income-contingent repay (ICR) plan. To qualify, the parent must convert the loan into a federal Direct Consolidation Loan, and the minimum monthly payment in an ICR is normally 20 percent of that person’s disposable income. The monthly payment may be lower, but the interest rate does not decrease. At some point, it becomes nearly impossible for that parent to get caught up.
The study recommends making these loans off-limits to families in the lower-income categories and encourages the Department of Education to allow students from these brackets to borrow more from themselves rather than resort to having their parents take out these types of loans.
The study also recommends no longer allowing schools to characterize these loans as “aid” in financial aid award letters. They also recommend requiring parents who take these loans out to complete counseling that makes it abundantly clear to them that these loans are their sole obligation and not their children, as well as explain the terms of the loans so that they are clearly understood.
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