Recently, The Wall Street Journal published an article on Baylor University pushing low-income families to take out parent PLUS loans for their students. The key problem with Parent PLUS loans is they don’t factor in income or credit scores for approval. Only cost of attendance. Thus, a family earning $40,000 annually could qualify for over $50,000 annually in loans, depending on the total cost of attendance for that school.
Currently, the cost of attendance for Baylor including everything from tuition to on-campus housing is almost $68,000. Subtract the $5,500 students can directly borrow in federal student loans, and the family is left with $62,500 to pay for. If students don’t receive scholarships or grants, that’s a lot of debt. Even with the Federal Pell Grant for a few thousand dollars a low-income student would like to receive, they’d still have almost $60,000 for the family to pay for or borrow.
What should parents do if they can’t afford a school without loans?
Parents need to start with calculating what they can afford to borrow. This rule applies whether the parent is borrowing under their own name or co-signing a loan for the student. Why? When you co-sign a loan you are also obligated to pay it back. Next, compare private student loan interest rates with the parent PLUS student loan rate. The current parent PLUS loan interest rate is 6.28%, which is a higher interest than what’s offered on private student loans for parents with good credit.
What if you can’t qualify for as high an amount of a private student loan as you need for a student’s college choice? Find a cheaper school, look for private scholarships, or negotiation financial aid with the student’s top choices. Getting into $200,000 in debt is seldom worth it.
What should parents do if they already have parent PLUS loans?
Luckily, all federal student loans have options for income-driven repayment. Parents should use studentloans.gov’s repayment calculator to check on repayment options for income-contingent payments. Extended plans with smaller payments or a longer period of time is also an option.
Is there any good news in the Wall Street Journal article?
As a whole, parent PLUS loans are dropping in popularity. This is largely because of increased knowledge that families with good credit can get better interest rates with private student loans.
Parents should be very aware of payment amounts before borrowing dollar one. Then, once an affordable amount of borrowing is calculated, then they compare loan, financial aid and school options. The best news is there are thousands of university options for your student to choose from. You don’t have to over borrow to send them to a school that benefits their future without hindering yours.