We value the good work and analysis of the Urban Institute on trends that impact access to the benefits of education. The value of a college degree has never been higher, but as we have often stated the value of a college education must be rational and include a discussion on college affordability for families and their students.
The research and trends demonstrate the importance of college parents in helping students afford a college education. Unfortunately, it may come at an expense to families that they may not be able to truly afford.
According to an excellent article by Kaitlin Mulhere, in Money Magazine, “Parents are borrowing more money than ever before to send their children to college—even as undergraduate borrowing has started to decline in recent years.
Nearly 800,000 parents borrowed an average of $16,452 during the 2017-18 academic year through the federal government’s PLUS program. The total $12.8 billion represented a 42% increase over a decade, according to a report published Tuesday by the Urban Institute, a D.C.-based think tank.”
The report also indicates that “during that same period, the amount of undergraduate student loans increased by only 2%, to $43.3 billion. As PLUS loans have grown in size and reach, the program has moved far away from its original aim to help wealthier families who didn’t have the cash on hand to pay for college, the authors argue, and has left some lower-income families in financial trouble.”
A Too Easy To Obtain Payment Option for Families?
The Department of Education and schools have made it easy for parents to accept a PLUS loan. In fact, virtually all parents qualify for a PLUS loan. Parents only need to show they don’t have an adverse credit history, which includes having delinquent debt or a recent foreclosure or bankruptcy.
There’s also a lax borrowing limit. Parents can take out up to the full cost of attendance, including tuition and living expenses, every year that their student is enrolled. Plus, there’s no vetting to determine whether a parent earns enough money to be able to repay the loans.
That program design makes it easy for parents to dig themselves in a deep hole, and financial experts have been warning that the loans are risky for several years.
According to Money Magazine, “Parents typically take out PLUS loans after their student has hit the federal borrowing limit, which falls between $5,500 and $7,500 annually, depending on the student’s year in college. That borrowing limit hasn’t budged in the past decade, despite rising college prices.”
Know The Difference – Private Loans & PLUS loans:
There are three main differences in private education loans and PLUS loans offered by the federal government.
Lender: Parent PLUS Loans are federal student loans. The federal government is the lender. Private student loans are offered by private financial institutions, such as banks and credit unions, states, as well as colleges and universities.
Primary Borrower: The parent is the primary borrower on a Parent PLUS Loan. The primary borrower of a private student loan can be the parent or the student. The parent may be a cosigner on the student’s private student loan.
Interest Rate: Parent PLUS Loans have fixed interest rates, currently 7.6% for the 2018-2019 academic year. Remember private student loans are based on borrower credit and come in fixed and variable interest rate options, depending on the lender.
College Parents of America recommends that families always consider scholarships, grants, and federal student loans, like Direct Subsidized and Unsubsidized Loans and Perkins Loans, before applying for private student loans. In addition, parents are smart to also secure life-insurance equal to the amount of the loan in the case either the parent or student dies prematurely.