College students take on loans as an investment: Presumably, they’ll graduate and reap the benefits — income that helps them repay that debt and then some.
But parents borrow for their children without the promise of higher earnings. And legally, they’re the ones on the hook.
Federal parent PLUS loans are easy to get: Colleges often list them alongside grants and undergraduate loans on financial aid award letters. They lack traditional underwriting requirements for credit history and income. There's also no limit.
These factors make it easy for parents to borrow more than they can handle.
"I feel like parents feel more pressure to take on unaffordable debt when it comes to college than they would for anything else," says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors.
Here's why parent PLUS loans can mount quickly, and how struggling parent borrowers can reduce payments and pursue forgiveness.
Why parent PLUS loans pose a repayment challenge
Parent PLUS loans were initially intended to help parents from middle- and upper-income backgrounds who didn’t have cash on hand, but had assets, says Kristin Blagg, a senior research associate in the Center on Education Data and Policy at the Urban Institute, a nonprofit research organization. But over time, the target borrower for these loans shifted toward middle- and lower-income families.
"The logic of ‘OK, you have assets you can lean on to repay this debt’ kind of falls apart for lower-income families," Blagg says.
Parent PLUS loans are also the most expensive federal loan type: Currently they carry an interest rate of 6.28% for the 2021-22 school year, compared with 3.73% for undergraduate loans. And they carry higher origination fees — currently 4.228%. Parents who meet traditional income and credit standards can do better.
Over the last seven years, parent PLUS loan debt has grown from $62.2 billion to $103.6 billion — a 67% increase.
While there’s little information about default rates among parent borrowers, both Mayotte and Fishman say there’s enough anecdotal evidence that shows some borrowers are struggling to repay these loans.
Current possibilities for parent borrowers
Here are the options available to parents now:
Pursue income-contingent repayment forgiveness. Income-driven repayment is a safety net for all federal student loan borrowers, but parent PLUS holders can access only the most costly of the four plans: income-contingent repayment, or ICR. This caps payments at 20% of your discretionary income and lasts 25 years.
ICR is especially useful for older parents who, once they retire, can expect to have reduced income. After 25 years of payments, parent borrowers will have the remainder of their debt forgiven.
Qualify for Public Service Loan Forgiveness. Public Service Loan Forgiveness provides the opportunity for forgiveness after 120 payments while the parent is working for an eligible nonprofit or government employer.
However, federal data analysis shows only 1.16% of all applications have been approved as of April 29, 2021.
Utilize closed school and borrower defense. When schools close suddenly or engage in deceptive practices, student loan borrowers, including parents, aren’t necessarily on the hook.according to the Department of Education.
If a borrower is misled by their school or the institution violated state laws, parent loans can be discharged through a forgiveness program called borrower defense to repayment.
Qualify for disability discharge. Parent loan borrowers who become verifiably disabled could qualify for total and permanent disability discharge.
Refinance privately in your child’s name. The only other way to get rid of your debt is to refinance in your child’s name with a private company. By doing this, your child would become legally responsible for repaying the debt.
Only a few private lenders do this.
Anna Helhoski writes for NerdWallet. Email: firstname.lastname@example.org. Twitter: @AnnaHelhoski.