NerdWallet has released a new study looking into the consequences for parents who take on student loans on behalf of their children in order to allow them to attend the college of their choice.
The report, titled “Got Parent PLUS Loans? Save Money With These Alternative Payment Plans,” which argues that taking on student loan debt for their children could hurt parents’ ability to accrue security during important years of saving for retirement, was released just in time for Financial Literacy Month.
“People will lend you money to go to college, but they won’t lend you money to retire,” says Delia Fernandez, a certified financial planner and president of Fernandez Financial Advisory LLC in Los Alamitos, California.
Report findings suggest that between 1989-90 and 2011-12, the percentage of federal student loan borrowers who held parent PLUS loans increased by an astounding 385%. That growth caused the percentage to go from 4.1% of all borrowers to 19.9%. In addition, the average amount of interest paid on those loans in that time more than doubled, going from $15,323 to $40,154.
According to the authors, payments on these loans are being made in the time period when parents should be saving for their retirement years. The quicker a loan burden is reduced, the more a person could be earning from compound interest accrued through investments.
In the same time period, the report found the average amount of parent PLUS loans borrowed to have more than tripled, going from $8,900 to $27,700. The average total interest paid rose almost 93%, going from $6,423 to $12,454.
Borrowers are able to take PLUS loans out for the total cost associated with attending a school for the entire year. With the average price of an on-campus student attending a four-year school at $30,320 per year as of 2013-14, the last year such data was available, parents could easily take out $121,280 in loans before their child graduates, not including any increases in tuition. In comparison, dependent undergraduates are only able to borrow $5,500 in federal direct loans as freshman and a total of $31,000 throughout their undergraduate career.
“For some people, it’s like having a mortgage. They can have over $100,000 in parent PLUS loans,” says Ginny Schroeder, leader of counseling services at FISC Consumer Credit Counseling of Northeast Wisconsin. “They feel that they have to do it because their child couldn’t go to school unless they did it, and that’s just not true.”
In order to reduce the amount of parent PLUS loan debt, the authors suggest several options. First, they say parents can refinance their loans by having a lender pay off their loan and giving the parent a private loan with a new, better interest rate. Those with good credit and a higher income than the balance on their loan will typically qualify for this option.
The authors also suggest that parents refinance their loan to their child. While the government does not allow PLUS loans to be transferred into a child’s name and still remain federal, refinancing lenders allow a child to take over a PLUS loan and refinance it in his or her own name.
Lastly, the report suggests parents sign up for income-contingent repayment and public service loan forgiveness.