When I talk about being a student loan lawyer, most people assume that my clients are all about 22 years old, fresh out college, dealing with crippling student loan debt. That’s actually not true at all. A large number of my clients are older folks who took out a particular type of federal loan called a Parent PLUS loan, for the benefit of their children. And many of them are struggling.
What is a Parent PLUS loan?
Unlike all other types of federal student loans, the parent is the one who borrows a Parent PLUS loan, not the student, and the parent (not the student) is the one who is legally responsible for the loan’s repayment. Even though the student is the one receiving the educational benefit, he or she bears no responsibility for that Parent PLUS loan; just the parent does.
Parent PLUS loans are often used to finance the “gap” between a student’s financial aid award and the total cost of attendance. That’s because undergraduate federal student loans are capped at relatively low levels, and that’s often not enough to pay the college bill. As a result, parents sometimes need to step in and find additional financing to close that gap if they cannot pay out of pocket. Parent PLUS loans can meet that need.
Parent PLUS loans accrue more interest
Federal student loan interest rates are set by Congress, and Parent PLUS loans have the highest possible interest rates of any federal loan program. Right now, Parent PLUS loan interest rates are 7.6%. Historically, they have been as high as 9%. Compare that to undergraduate Stafford loan interest rates, which are currently at about 5% (and historically have been as low as 2-3%).
In addition, Parent PLUS loans are unsubsidized loans, meaning they start accruing interest as soon as they are disbursed – and it never stops. Subsidized federal Stafford loans, meanwhile, do not accrue interest while the borrower is in school or while the loan is in deferment.
Taken together, the higher interest rates and lack of subsidy mean that Parent PLUS borrowers will wind up paying much, much more than they originally borrowed, and their payments will have to be quite high to keep up.
Parent PLUS loans have fewer repayment options
Federal student loans generally are eligible for a wide menu of repayment options, including Extended plans, Graduated plans, and multiple income driven repayment plans such as Income Based Repayment (IBR) and Pay As You Earn (PAYE), where the borrower’s income can help determine the payment amount.
As a general rule, Parent PLUS loans have fewer repayment options. While they can sometimes be repaid under Extended or Graduated plans, they cannot be repaid under IBR, PAYE, or Revised Pay As You Earn (REPAYE). Parent PLUS loans can be repaid under another income-driven plan called Income-Contingent Repayment (ICR) if the loans are first consolidated via a Direct consolidation loan. However, Direct consolidation is not the right decision for everyone, and ICR is almost always going to be more expensive than IBR, PAYE, or REPAYE.
But, Parent PLUS loans still have some benefits
Despite their significant shortcomings, Parent PLUS loans are still federal loans, and therefore they still have some advantages compared to purely private student loans. These advantages include:
- A tax-free discharge if the parent borrower, or the student who received the loan benefit, dies;
- A tax-free discharge if the parent borrower becomes totally and permanently disabled;
- Generous deferment and forbearance options during periods of economic hardship;
- The right to cure default through federal rehabilitation or consolidation programs.
Parent PLUS loans have some major flaws. High interest rates and the lack of subsidies can make them very expensive to repay. And repayment options are much narrower than they are for most other types of federal loans. However, compared to many private student loan programs, Parent PLUS loans have comparatively greater flexibility and stronger consumer protections, which can make then a more attractive option. To minimize long-term problems associated with Parent PLUS loans, borrowing should be kept to a minimum, to the extent possible.