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 The grim reality is that the federal PLUS loan program allows
parents to borrow far more than they can comfortably, or even ever,
repay.
PLUS loans let parents (and graduate students) borrow up to the full
cost of an education. There is only a basic credit check and no
underwriting to determine whether the borrower has the income or
ability to repay the loans.
The vast majority of parents do not borrow nearly as much as
Democratic president hopeful Martin O'Malley and his wife, who said
they have borrowed $339,200 to educate the first two of their four
children, or Republican presidential candidate Scott Walker, who has
borrowed between $100,000 and $120,000 for his two sons who are
still in college, according to recently filed financial disclosure
forms.
But even much smaller amounts can prove difficult to repay for some
parents. An analysis by financial aid expert Mark Kantrowitz in 2012
found that monthly PLUS loan payments ate up an average 38 percent
of monthly income for borrowers in the lowest 10 percent of incomes.
One in five parent borrowers had a child that received a Pell Grant,
which are reserved for the poorest students with household incomes
of $50,000 or less.
An article published by investigative site ProPublica last year
highlighted a woman living on Social Security disability payments
who had $45,000 in parent PLUS loans for her child. (The average
Social Security disability recipient gets about $14,000 a year,
while the maximum possible benefit is just under $32,000.)
Parent PLUS default rates are still far below those for
undergraduate student loans — 5 percent of parent borrowers in 2010
defaulted within three years compared to 15 percent of student
borrowers. But the parent rate has nearly tripled over the past four
years, suggesting a rising tide of floundering borrowers.
REPAYMENT PLANS
The Obama administration in recent years expanded income-based
repayment programs for struggling student borrowers, typically
reducing payments to 10 percent or less of their incomes. The
lowest-income student borrowers do not have to pay anything, and
forgiveness of remaining balances is possible after 10 years for
those in public service jobs and 20 years otherwise.
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There is no similar help for parents. The income-contingent
repayment plans available are not as generous, and there is no
forgiveness. As with student loans, parent PLUS loans are extremely
difficult to erase in bankruptcy and the government has
extraordinary powers to collect, seizing tax refunds, getting wage
garnishments without going to court and taking a portion of
defaulted borrowers' Social Security checks, which are off-limits to
other creditors.
In general, PLUS loans that total less than the parents' annual
incomes can be paid off within 10 years, Kantrowitz said. If the
parents were within five years of retirement, they should limit
total education debt to 50 percent of their income, he said.
That does not mean taking on that much debt is smart. College
graduates presumably will benefit from higher incomes as the result
of their education. Their parents will not. Parents also have fewer
working years ahead of them, which means any financial setback such
as a layoff can make a heavy debt load overwhelming and kill any
shot at a comfortable retirement.
"I would never recommend parents borrow six-figure debt for their
children, even if they can afford to repay the debt," Kantrowitz
said, adding, "Parents don’t always make the smartest financial
decisions."
(Editing by Lauren Young and Jonathan Oatis)
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