Should a Parent Take out a Parent PLUS Loan?
We know you love your kids and want the best for them. Paying for their college education may be high on your list of goals. Most of the time I hear parents wanting to make sure their child isn’t saddled with tremendous student loan debt, and that makes sense. However, when I, as a financial planner, am working on your plan, I’m keeping you and your needs at the front of my mind. When you have conflicting goals such as your retirement and your child’s education, what do I recommend?
This is a good opportunity to confirm that your retirement needs are on track before taking out additional debt for education expenses such as a Parent PLUS Loan. Think about what they say on the flight safety instructions for the oxygen mask: be sure to put your mask on before helping others. I believe the same should be true when giving gifts, loans or taking on additional debt on behalf of family members. You need to make sure your finances are steady before you can help others.
There may be a circumstance where your child is unable to take out his or her own student loan, and you have the option of a Parent PLUS loan. This is not the same as co-signing a loan—you as the parent are taking out additional debt for the education of a dependent, undergraduate student.
What you should know about the Parent PLUS loan:
• These loans are not subsidized, meaning interest accrues immediately
• You don’t need to borrow the full amount offered—this could be just a supplement where remaining funds come other sources
• You need to meet the credit requirements which include a 2-year period of no overdue debt (over a small threshold) and a 5-year period without adverse credit history such as bankruptcy, foreclosure or tax liens among others
• These loans are capped at the cost of attendance versus a dollar maximum
• Interest rates are usually higher than undergraduate federal student loans
• The loan can be forgiven if either the student or the parent borrower dies (an interesting feature, but far from ideal)
After the Parent PLUS loan has been taken out, what can you do to shift the responsibility of the loan to your kids? Make this part of the arrangement that they’ll either start making payments to you to contribute toward the loan or consider having your child refinance the loan in their own name. Your child will need to have good credit to qualify and, of course, enough income to make the student loan payments. Keep in mind that until the loan is assumed by your child, you are still legally liable for the debt.
Your child has options. They could always wait to go to college, choose a less expensive college, attend community college, take dual enrollment classes to get college credits while still in high school…the list goes on. You, on the other hand, have fewer options to borrow to fund your retirement. Bottom line, before taking on additional debt for your child with a Parent Plus loan, check that you’re on track with your financial health first.