These days, the hardest part about getting through college often isn’t the workload – it’s figuring out how to pay for it. With the total student loan debt surpassing $1.2 trillion, many of today’s grads are leaving school with a heavy financial burden. In some cases, parents are sharing some of the load by taking out PLUS loans to help cover the cost of their child’s education. While there are some advantages associated with these types of loans, borrowing on your student’s behalf can end up backfiring. If you’re a parent who’s considering a PLUS loan, you need to weigh the pros and cons carefully before signing on the dotted line.
Pro #1: Fixed interest rates
PLUS loans come with an interest rate that’s fixed for the life of the loan, which means you’ll know exactly how much you’ll pay in interest in the long run. As of July 1, 2015, the current interest rate for Parent PLUS loans is 6.84%. While this may seem high compared to the 4.29% rate undergraduates pay for direct loans, it’s still lower than many of the rates offered by private lenders.
Pro #2: Flexible repayment options
Parents can choose the standard, extended or graduated repayment plan for a PLUS loan. Depending on which plan you choose, you’ll have anywhere from 10 to 25 years to repay the loan. If you’re having trouble keeping up with the payments, you have the option of switching to a different repayment plan, taking a deferment or requesting a forbearance. Deferment means you won’t owe a payment for a set period of time and interest won’t accrue. Forbearance also lets you postpone payments but the interest on the loan keeps adding up.
Pro #3: Tax-deductible interest
Interest you pay towards a student loan, including a PLUS loan, may score you a break at tax time. Currently, the most you can deduct is either $2,500 or the total amount of student loan interest you paid, whichever is less. The amount of the deduction you’re eligible for is based on your income. The full deduction is available to single filers earning less than $60,000 and married couples making less than $125,000. The deduction is phased out completely at $75,000 and $155,000 respectively.
Con #1: No limits on borrowing
Unlike other types of student loans, there’s no limit as to how much a parent can borrow through a PLUS loan, as long as it doesn’t exceed the cost of your child’s education. While this may seem like an advantage, it can actually work against you if you end up taking on more debt than you can reasonably handle. You have to consider whether those large monthly payments will still be affordable if your situation were to change unexpectedly. It’s also worth thinking about how the long-term cost impacts other financial priorities, such as saving for retirement.
Con #2: No grace period
Typically, when you take out a student loan you have six months from the time you graduate to begin repaying the loan. With a PLUS loan, parents are expected to start making payments within 60 days of the loan being disbursed. You can, however, request a deferment period if your student is still enrolled at least half-time or for a period of six months following their graduation.
Con #3: Dangers of default
If you fall behind on your PLUS loan payments you run the risk of going into default. Once you default, you open yourself up to a number of potentially nasty consequences. Your lender may ask you to repay the remaining balance in full. If you can’t, they may decide to sue and seek to garnish your wages or seize your tax refunds. You’ll also be responsible for paying court costs, attorney fees and collection costs. You won’t be eligible to take out any other student loans and your credit will take a serious hit.
The Bottom Line
If getting your child through college is your number on goal, you have to know what it is you’re agreeing to when you take out a PLUS loan. Borrowing $100,000 just to keep your student from falling into debt isn’t really worth it if it puts you in a tight spot. Before taking out one of these loans, you need to carefully evaluate your financial situation and your long-term goals to see whether taking on more debt makes sense.
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