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50 Colleges Where Parents Have the Most Trouble Repaying Loans
China's Digital Yuan Launch in 2022 Could 'Upend Rules Of Global Commerce'

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 * Debt
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Newsweek Magazine


10 WAYS PARENTS CAN BORROW SMARTER FOR COLLEGE

Jul 21, 2021 at 5:00 AM EDT


John Kuczala/Getty
By Kerri Anne Renzulli
Senior Reporter
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About a quarter of all the money lent by the federal government last year to
help families pay for college went to parents, who have sharply ramped up
borrowing in recent years to cover high tuition costs.

Over the past decade, even as loans to undergraduates fell, parent borrowing
under the federal PLUS loan program increased 16 percent, according to the
College Board. That's pushed parents' total PLUS-loan debt to over $103 billion,
or an average of $28,700 per borrower, the Department of Education reports, with
billions more owed on private college loans, held solely in the parent's name or
co-signed with children.


Parent Loans 'Fraught With Peril;' Defaults Hit 30 Percent at Some Colleges
Read more
Parent Loans 'Fraught With Peril;' Defaults Hit 30 Percent at Some Colleges

While borrowing for college can be a lifeline to helping your child obtain a
degree, taking on such debt can also saddle you with high monthly payments that
strain your wallet and threaten your future financial security in retirement.

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A new Newsweek analysis of parent-loan data recently released by the federal
government shows how quickly many families run into serious problems: About one
in 10 parents default or are seriously late with payments within just two years
of their child leaving college. And at more than 150 schools out of the nearly
1,000 colleges and universities in the database, parent default and delinquency
rates hit 20 percent or more.

So before you borrow to help foot the bill for your kid's tuition, here's what
you need to know to manage the loans wisely and avoid your own personal student
debt crisis.


Exclusively Available to Subscribers Try it now for $1


BEFORE YOU APPLY

Know your true cost. Some schools include Parent PLUS loans in the financial aid
package presented to accepted students, creating confusion about the true cost
of attendance. "Many families, especially those whose children are
first-generation U.S. college students, don't realize this is a loan because of
how it shows up on the aid letter," says Betsy Mayotte, president of The
Institute of Student Loan Advisors. If the aid package is difficult to decipher,
reach out to the financial aid office for help and a breakdown without the PLUS
loan.



Think twice before you agree to take out a Parent PLUS loan to pay for your
child's dream college. About a tenth of parents defaulted or were seriously late
with payments within just two years... Think twice before you agree to take out
a Parent PLUS loan to pay for your child's dream college. About a tenth of
parents defaulted or were seriously late with payments within just two years of
their child leaving school. More fizkes/Getty Images

Max out student loans first. Federal student loans for undergraduates carry
interest rates of 3.73 percent for the 2021-2022 school year, almost half of the
6.28 percent rate for parents under the PLUS loan program. Loans to students
also come with a wider variety of repayment plans, and may offer partially
subsidized interest. So before you even consider a PLUS loan, have your child
borrow in their own name first: up to $5,500 for freshmen, $6,500 for
sophomores, $7,500 for juniors and seniors. If you have the financial means, you
can always help them with the payments later.

Calculate the hit to your lifestyle. Because you will likely be taking out more
than one PLUS loan to cover your child's education, it's important to think
long-term. If you borrow $15,000 this year, you'll owe $170 a month for the next
10 years. Factor in similar borrowing for another three years and you'll be
$60,000 in debt and owe $679 a month. Breaking it down this way shows the loan's
impact on your future ability to afford day-to-day expenses, save for retirement
or pay off other debt, like your mortgage.



Look into other ways to pay. Check the online databases at FastWeb.com and the
CollegeBoard for scholarship opportunities. Some schools, such as Clarkson and
Purdue, offer income-sharing agreements, in which they provide a set amount
toward tuition in exchange for a percentage of the student's post-graduation
income for a fixed period. Tuition installment plans, which spread the cost of
college over a 10-month period, rather than a lump sum, can also make payments
more affordable.

Read more
 * 50 Colleges Where Parents Have the Most Trouble Repaying Loans
 * 50 Colleges Where Parents Take Out the Biggest Loans to Pay Tuition
 * 90 Percent of Student Loan Borrowers Say Not Ready to Restart Payments

Consider other loans. Banks are offering home equity lines of credit with rates
as low as 2.5 percent—the average is 4 percent—no origination fee and low or no
closing costs. That makes them a compelling alternative to a PLUS loan if you're
a homeowner with a healthy amount of equity and a credit score of at least 620
(though a 740-plus score will snag the best rates). Private parent loans charge
interest rates as low as 3 percent and have no origination fees but you'll miss
out on the protections federal loans provide, such as forgiveness if you become
disabled or if the student dies.



With PLUS loans, Parents can borrow up to the full cost of attendance each year
minus any financial aid the student receives. With PLUS loans, Parents can
borrow up to the full cost of attendance each year minus any financial aid the
student receives. XiXinXing/Getty Images


AFTER YOU'RE APPROVED

Borrow as little as possible. PLUS loans allow you to borrow the full cost of
attendance, without regard to your ability to afford the payments. Just because
they let you borrow that much doesn't mean you should take them up on it. A good
rule of thumb, says financial aid expert Mark Kantrowitz: Limit your total
education debt for all children to no more than your annual household income—and
less if you're within 10 years of retirement.

Start repaying immediately. Unlike loans to students, payments on parent loans
begin as soon as the money is doled out. You can defer for up to six months
after your child graduates but interest will continue to accrue; if you borrow,
say, $15,000, with a 6.28 percent interest rate and 10-year repayment plan, that
loan will balloon to $19,240 by the time repayments start. "If you can't afford
the payment right now and plan to defer, that's a sign that you shouldn't be
borrowing that amount," says Mayotte.



Let your employer help. About 8 percent of employers provide workers with
student loan repayment assistance, including Aetna, Google and Hulu, according
to the Society for Human Resource Management. While these programs are often
targeted toward younger employees, most of them also apply to older workers with
Parent PLUS loans, says Kantrowitz. More companies are expected to add this
perk, too, thanks to pandemic legislation that made up to $5,250 of such
assistance a tax-free benefit to employees through the end of 2025.


Last year, one out of every four dollars in federal loans given out for
undergraduate education went to people paying for a kid or grandkid’s studies
through the federal Parent Plus loan program, with an... Last year, one out of
every four dollars in federal loans given out for undergraduate education went
to people paying for a kid or grandkid’s studies through the federal Parent Plus
loan program, with an average loan of $16,305. More SeanZeroThree/Getty Images

Let Uncle Sam help. PLUS loan borrowers can deduct up to $2,500 in student loan
interest a year from their taxable income, without itemizing. The benefit is
gradually reduced if your income is between $140,000 and $170,000 for married
couples, or $70,000 and $85,000 for single or head of household filers. Earn
above those amounts and you can't claim the deduction at all. But for those who
can, the break is worth up to $600.



Catch a break. Struggling financially? Don't simply stop making payments, which
can result in the government garnishing your wages, Social Security benefits or
tax refunds. If the problem is temporary, you can apply for forbearance, or a
pause in payments, for up to 12 months. Alternatively, you can reduce monthly
payments by switching to a 25-year repayment plan, from the standard 10 years,
or an income-contingent plan that will limit payments to 20 percent of your
discretionary income (after 25 years, any remaining balance is forgiven). The
downside of all these options: You'll pay more in interest and it'll take longer
to get out of debt—you could be paying well into your retirement or even for the
rest of your life.


Illustration by Alex Fine for Newsweek
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ABOUT THE WRITER

Kerri Anne Renzulli
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Kerri Anne Renzulli is personal finance journalist based in London; she's
written for Money, Financial Planning magazine and CNBC.

Kerri Anne Renzulli is personal finance journalist based in London; she's
written for Money, Financial Planning magazine and CNBC.

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