Hi everyone! Welcome back to Melissa Making Cents!
One of the many things I've learned in my fifteen years as a CERTIFIED FINANCIAL PLANNER™, is that parents and grandparents are often willing to spare no expense to send their students to college. This is fine if you are able to create a comprehensive college funding plan or you know you will need to borrow and preemptively create a plan to pay off student loan debt.
Pop quiz...which age group is the fastest growing segment of student loan borrowers? You might have guessed the answer is young adults ages 18-25. But research from the Consumer Financial Protection Bureau shows that an increasing amount of student loan borrowers are over the age of 60! Similarly, a 2019 report from theAARP Public Policy Institute reportfound that 15 years ago, borrowers over the age of 50 and over held only about 10 percent of the nation’s student loan debt ($47 billion of the nation’s $455.2 billion). But by 2018, that proportion had nearly doubled, accounting for $289.5 billion of the $1.5 trillion in student debt.
It’s not that people over the age of 50 or 60 are looking to go to college. Instead, they are trying to finance their children’s (or grandchildren’s) education. But does it make sense for parents or grandparents to take on student loan debt, or could you be hurting your financial future? Let’s find out.
When Parents Can Take on Student Loan Debt
When determining whether or not to take on student loan debt, ask yourself these questions first:
- Are you on track for retirement? You should never borrow from your retirement accounts or stop saving in order to take on student loan debt.
- What other debt do you have? If you’re still a long way toward paying off a mortgage or significant credit card debt, adding a student loan payment is probably not a good idea.
- Do you have an emergency fund? Paying student loans should never eat into your financial cushion or jeopardize your safety net.
- Do you and your child have a plan for graduating on time? Parents who take on student loans have a financial responsibility, but students will have the academic responsibility. Make sure everyone is on the same page about expectations.
Talking with a financial planner can help you get an outside perspective and an overall snapshot of your finances. If you determine based on these questions that you can afford to take out student loans, then read on for some recommendations.
A Look at Parent Plus Loans
Before seeking additional loans for parents, see what borrowing options are available for students themselves. The Direct Loan program (Stafford program) is usually the first step due to their relatively low fixed interest rates and flexible repayment terms. Direct Loans also have set borrowing limits ($5,500 - $12,500 per year, depending on the year in school) to help students maintain a more manageable debt load. You can learn more about the Direct Loan program in my recent breakdown about different types of student loans.
If the student has hit the maximum borrowing limit for Direct Loans and you as a parent are in a financial position to take on some loans to help, the federally held Parent PLUS loans are often the way to go. However, it’s easy for these loans to add up. Unlike the Direct Loan program, which caps how much students can take out, the amount of Parent PLUS loans can cover up to the full cost of college attendance every year. Interest also accrues on these loans while the student is still in school.
And the loans don’t come cheap. The current fixed interest rate for the Parent PLUS loan is 7.08%, and there is an additional loan fee of 4.236%. It’s also worth noting that Parent PLUS borrowers have had increased default rates over the past few years while repayment rates have decreased. Remember also that if the parent signs for the loan, it cannot be transferred to the student later on.
Unlike private loans, PLUS loans do not require minimum credit scores or debt-to-income ratios. The main vetting process is that borrowers will need to undergo a credit check. But interest rates for some private loans could be cheaper, so it is worth researching all avenues before signing on the dotted line.
Qualifying for Public Service Loan Forgiveness
So...can parents have their student loans forgiven? Parent PLUS loan borrowers are eligible for Public Service Loan Forgiveness after making 120 qualifying payments while working full time in a government position or for a nonprofit. You would need to apply for a Direct Consolidation loan first, and I recommend speaking with a financial planner first to determine if you would be eligible for this option.
Another way to get Parent PLUS Loans forgiven is through theincome-contingent repayment(ICR). ICR limits monthly payments to whichever of these is lower: 20% of your discretionary income, or the amount you would pay on a fixed 12-year plan. The catch is that ICR extends your repayment terms to 25 years, and any amount remaining after 25 years will be forgiven... as taxable income. The interest costs of ICR are also a lot more than a standard repayment over time. It’s likely that you don’t want to be thinking about student loans while in retirement (or needing to delay retirement in order to pay off student loans!), so ICR is usually better suited for students rather than parents.
To recap, there’s no simple answer as to whether parents should finance their children’s college education. If you’re looking for a quick checklist about whether borrowing student loans as a parent could be an option for you, follow these steps:
- Try to minimize the cost of college through comprehensive college planning, which includes looking at less expensive schools, making a plan to graduate early, or saving on room and board.
- Estimate your family’s expected contribution using College Aid Pro. Compare this number to your existing college savings, such as those in a 529 plan, and see how much is left to pay.
- If loans are required, max out federal student aid through the Direct Loan program first. These generally have the most favorable terms and interest rates for student borrowers, as well as limits.
- Then -- and only if doing so would not impact your retirement or emergency funds -- explore parental options through Parent PLUS and/or private loans. Since there’s no artificial limit for these loans, make sure you only borrow what you can afford. Parent PLUS may be an attractive option for parents who would qualify for public loan forgiveness, while private loans could be better for parents with strong credit scores and eligibility for lower interest rates.
As a Certified Financial Planner and as a parent myself, answering questions revolving around money and investing in children’s future is near and dear to my heart. If you’re a parent starting the college application process with your child, please call or email to schedule an appointment with me.
Until next time...this is Melissa Making Cents!
Melissa Anne Cox
CERTIFIED FINANCIAL PLANNER™ is also a College Planning and Student Loan Advisor in Dallas Texas.