P is for the Potential Pitfalls of Parent Direct Plus Loans

 

The cost of college has been soaring, and so has the amount of student loan debt. We all want our kids to go to college but at what cost? Let’s talk about the dangers of one student loan in particular “The Parent Direct PLUS Loan.”

This specific loan is one that parents should be wary about when applying. The Parent PLUS loan has no restriction on the amount that can be borrowed and is absurdly easy to obtain. This may leave families vulnerable to over-extending themselves for the sake of their children. Before you sign on the dotted line consider the following:

  • The PLUS loan does not include the federal safety net of an income-driven repayment plan which allows students the benefit of paying a percentage of their discretionary income according to their earnings and family size.
  • The PLUS loan interest rate and fees are incredibly high. At present, the interest rate is 8.5 percent, and the origination fee is 4.2 percent.
  • This loan has no limit on the amount that can be borrowed for tuition and living expenses. Parents may find themselves taking out more than they can afford to allow their children to go to the school of their choice.
  • This is a government loan; the debt doesn’t go away, and it has limited repayment options.
  • The federal government has the power to garnish parents’ wages and social security payments. Government debt generally cannot be discharged in bankruptcy, and the government may add fees and penalties for late payments and collection.

So before you put yourself in a risky and painful situation that may jeopardize your finances, know all the facts and be realistic about how much you can afford to borrow.  Just because you are approved, doesn’t mean you can afford it. An excellent resource to help you analyze the amount you can afford is the College Board’s Parent Loan Repayment Calculator.

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About Ann Zuraw

Ann Zuraw, the voice behind "Chicks, Chat and Change", is a Certified Financial Planner (CFP®), Chartered Financial Analyst (CFA®), and Certified Divorce Financial Analyst (CDFA™).If you have comments on this post contact Ann Zuraw

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