College Tip: Know the Risks of Paying for College with Plus Loans

If you can’t afford a college without a PLUS loan, then for many parents and families the college is simply not affordable.

Parents are a vital source of financial support for their college students.  For a varieity of reasons many families have “GAP” to pay for the balance of education and schools often promote to parents the oppportunity to fund the cost of college through a PLUS loan.

Quoting PayingforCollege101 “the fact is that if you can’t afford a college without a PLUS loan, then the college is simply not affordable. PLUS loans are pretty much financial time bombs with few options for defusing.”

History of PLUS LOans 
College Parents of America has long advocated for practical ways for families to support their college students goal of completing a higher education.  For instance, increasing the child-tax credit for families or adjusting it for inflation would be a good place to start without the cost of borrowing or the administration costs of schools and the government.

Like many government programs.  There was a good idea behind the original structure for PLUS loans which were designed for parents to use to get through unexpected financial hardships while their students were in college. In 1993, $4,000 wasn’t going to cover the cost of tuition. However, it would make a difference if there was a family emergency. A PLUS loan provided the family with some extra money until the following year’s financial aid application.

However, that changed in 1993, when the cap of $4,000 a year with an aggregate limit of $20,000 for PLUC loans were removed. Parents could now borrow up to the entire amount of the cost of attendance.  This alone defies logic in that it doesn’t require parents to demonstrate any ability to actually repay the loan and never designed accountability for schools that benefit from the loans to deliver a quality education.

Fundamental Disconnect of Incentives & Rewards.

The basic problem of paying for college with PLUS loans. Students receive loans because theoretically, going to college will dramatically improve their economic situation and they will be able to repay their loan. The loan allows them to change their situation.When parents take out the loan, they aren’t receiving any sort of economic benefit. Nothing in their situation will change to allow them to repay the loan. They just now owe more money.

It shouldn’t be a surprize that colleges and universities are fine with this and even support the expansion of PLUS loans.  After all, they aren’t actually the institutions lending the money.

ProPublica and The Chronicle of Higher Education in No Income? No Problem! How the Gov’t Is Saddling Parents with College Loans They Can’t Afford

…found that Plus loans can sometimes hurt the very families they are intended to help: The loans are both remarkably easy to get and nearly impossible to get out from under for families who’ve overreached. When a parent applies for a Plus loan, the government checks credit history, but it doesn’t assess whether the borrower has the ability to repay the loan. It doesn’t check income. It doesn’t check employment status. It doesn’t check how much other debt — like a mortgage, or other student-loan debt — the borrower is already on the hook for.

The truth is that for some families, not taking out a loan will mean that their students will have to start at a community college. Of course, that’s not what most hard working students want to hear or think they deserve. And it’s certainly not fair.

Colleges Don’t Suffer When Parents Default
Nonetheless, PLUS loans are dangerous. Many university “award letters” list them among they steps necessary for a family to be able to meet the full cost of attendance.   Some even list PLUS loans on student’s financial aid awards as a way of showing the current amount owed by families as being “0”.   Never mind parents will have to start repaying immediately and then borrow again for the next three years.

Too often, the parents are being asked to take out the equivalent of a car loan every year for four years.

Richard Fossey, Professor at University of Louisiana, observes: “Of course it is madness for parents to pay a fifth of their discretionary income for 25 years in order for their child to go to college. There are lots of college options that don’t require that kind of sacrifice.”

Research Private Loan Alternatives 
College Parents of America still supports for the practical value of a PLUS laon for a college family.  But this should only be done after carefully considering the risks and available alternatives including private student loans from banks that often do not contain origination fees.

PLUS Loans vs. Private Student loans in 2019

There are many good alternatives for credit-worthy families and a smart place to start is the financial aid office of your school or Lending Tree which is a competitive market place of private lenders.