What Every Parent Needs to Know About PLUS Loans for College
Parents are borrowing more than ever for college. That could mean failing at Retirement 101
While there is plenty of attention trained on the financial burden that the sharp rise in student loans has created for young adults, what gets less attention is how parents are increasingly going into debt to help pay for school. That’s creating a separate and serious problem: Parents are finding it harder to stay on track — or even get on track — for funding their fast approaching retirements.
According to a research report issued by the Urban Institute and New America, the PLUS loan – the federal loan available to parents — accounted for 23% of all federal loans for undergrads in 2017-2018, up from 14% just five years earlier. The $12.8 billion in outstanding PLUS loans in 2017 was 42% higher than the level in 2007 — and that’s after adjusting for inflation.
Parents of nearly 780,000 undergrads took out a PLUS in 2017-2018, and the average loan was around $16,500. That’s just for one year; like all federal loans, borrowers reapply each academic year. Multiply by four years and that’s north of $65,000 before factoring in the interest payment, which is a fixed 7.8% for this academic year.
And plenty of those parents are heading into their retirement years still owing money back on these loans; 25% of current PLUS loan borrowers are at least 60 years old. Paying off the mortgage is a big retirement win, but one made so much harder by adding college debt. For many households, the dollars that go toward paying back PLUS loans reduce household dollars that might otherwise be saved in 401(k)s and IRAs.
Indeed, a recent survey by T. Rowe Price found that more than half of parents put paying for college ahead of saving for their own retirement, and one in four said in the past two years they had pulled money from retirement accounts to pay for college.
That’s a misguided plan. There are ways to get a degree without having to curtail or raid the parent’s retirement fund. There is absolutely no loan available for parents who end up in retirement short of what they need.
What makes it doubly hard for parents is that we’re typically hard-wired to focus more on today than tomorrow. The kids are going to school soon; retirement can wait, goes the thinking. But that’s putting the whole family at great risk, if parents land in retirement without enough savings.
Avoiding that unwanted future requires families to take a clear-eyed look at how to avoid the hidden risks of PLUS loans.
Don’t borrow if you are behind on retirement savings. And no, thinking you will just delay retirement is not a safe strategy either. You may indeed work, but it may not be at the same job and the same salary at 65 that you have today.
Work with your child to focus on schools that will be inclined to give a bigger aid package, so you don’t have to borrow. Not the dream school? Are you sure? A school where you and your kid emerge in solid financial shape seems like a pretty solid goal.
Your kid should borrow first anyway. Students can borrow between $5,500 (freshman) and $7,500 (junior and senior) a year from the federal government. The interest rate is always lower than PLUS loans. This academic year the fixed rate is 4.53%. Every student is eligible; the only requirement is that a family must complete the Free Application for Federal Student Aid form to apply.
If you plan on taking out a PLUS, beware the borrowing trap. The biggest problem with PLUS loans is that unlike borrowing for a house or car, there is no lender running the numbers to decide if you have the ability to repay and how much you can likely afford to borrow. With a PLUS you can borrow as much as you need to cover a child’s college expenses. Moreover, there’s no FICO credit score check. The only credit check is to make sure you haven’t had any debt charge-offs in two years; aren’t behind on current debt payments (only a small sum can be more than 90 days late); and haven’t had a bankruptcy, tax lien, wage garnishment or foreclosure in the past five years. (Note, if any of that is in play, the undergrad student will be eligible to borrow more.)
Mark Kantrowitz, publisher of the savingforcollege.com website and noted financial aid expert, recommends that parents keep their borrowing (for all kids, combined) to no more than their annual income. With that limit you should be able to pay the money back within 10 years. If you plan to retire earlier, you should calibrate any borrowing to have it paid before you leave work behind.