Undergraduate federal loans have relatively low borrowing limits, minimizing the amount of money a student can borrow towards financing their education. That prompts most parents to take Parent PLUS loans to help their children cover the deficit.
The loans come in handy as they allow you to take out an amount that covers the cost of attending school and any other financial need of the dependent child. While that may sound all rosy and appealing, these loans aren’t devoid of shortcomings. If you’re wondering why Parent PLUS loans can be problematic, read on to find out the reasons.
Few Repayment Options
The payment options for parent loans are fewer than their federal student loan counterparts. With these loans, it’s highly unlikely to get a payment plan based on your family income. Parent loans typically require repayment via Graduated or Extended plans, but you could qualify for an Income Contingent Repayment (ICR) if you first consolidate the loan. ICR isn’t an ideal repayment mode for most parents as it’s almost always more expensive than other federal loan repayment options such as Pay As You Earn (PAYE) and Income-Based Repayment (IBR). Another problem with ICR is that the monthly payments you’ll make will be similar throughout the loan repayment period, regardless of your financial situation.
Other than the limited choice of repayment plans, you’ll have to start making payments towards the recovery of the loan as soon as you receive the entire amount of the loan. And while you can apply for a student loan payment deferment for the entire period your child is in school or up until six months after your child graduates, you’ll still accrue interest charges during this period.
A High-Interest Rate
A parent loan comes with a 6.284% interest fee. Additionally, the loan attracts an origination fee, usually 4.2% of the total loan amount, an amount the lender automatically deducts from the loan you’ve borrowed. That means you’ll have to pay a much larger fee than the typical interest. Additionally, the government doesn’t offer subsidies on Parent PLUS loans, and the loan’s interest never ceases to increase until you repay the loan fully. These two factors make parent loans a costly higher education financing option.
Severe Government Collection Measures
A parent loan can be quite problematic if you default on your payments. Note that there’s no time limit for the government to collect the loans. The government is also at liberty to recover payments towards the parent loan by any means necessary. Such measures may include:
- Withholding money from your social security fund.
- Garnishing your wages.
- Withholding your tax refunds.
And, even if you file for bankruptcy or go into retirement, there’s no getting away from these loans—you’ll have to make the necessary monthly remittance until you pay the parent loan in full.
With No Borrowing Limit Comes Over Borrowing
While federal student loans have an annual and overall limit on the amount of money a student can borrow towards their higher education needs, parent loans don’t have this limit. Therefore, you may easily borrow more than is necessary and incur a huge debt with a high-interest rate. If you have other financial commitments like mortgages, you might get yourself in a financial crisis for a long period since there’s no escaping these loans.
The above insights are a clear indication of why Parent PLUS loans can be problematic. It would be best to weigh all options when it comes to financing your child’s education through loans—you don’t want to select a loan that’ll cripple you financially in the future.
Multiple lenders offer different terms and interest rates, so the best thing to do is search for a provider with the best terms for you and the most affordable repayment options. With a good credit score, nothing will stop you from securing your child a good education without much hustle.