How to Pay College Tuition Without Getting a Parent PLUS Loan
Older Americans have more student loan debt than ever before, but in many cases, it’s not because of their own college education costs. The number of Americans aged 60 and over with student loan arrears quadrupled from 700,000 to 2.8 million between 2005 and 2015, with the majority of loans going to children, according to a report by the Bureau of Consumer Financial Protection. and grandchildren.
Parent PLUS loans are attractive because they can help consumers, especially low-income families, close the assistance gap. But Parent PLUS Loans or Private Loan Shared Loans should be the last source of funding for your child’s education. While colleges can make them attractive, they can seriously hurt your finances as you get closer to retirement.
“Critics argue that in some cases schools may deliberately downplay risks by wrapping financial aid letters so that Parent PLUS loans look more like gift aid than actual debt,” notes US News & World Report . Interest rates are high, and taking on tens of thousands of future debt is sure to give parents an unexpected financial headache. According to a CFPB report, “nearly 40 percent of federal student loan borrowers aged 65 and over default.”
One obvious alternative: choose a cheaper school. We’ve covered a bit of other options here . However, other than that, you may want to consider the following strategies.
Make sure your child makes the most of loan options first
You probably don’t want your child to be saddled with a lot of debt, but especially with federal loans, students have more options and better protection than their parents. For example, “although schools can be fined by the Department of Education if too many of their students fail to pay off student loans, they do not adhere to the same standard of parents failing to pay off student debt,” reports US News. “This gives schools an added incentive to supplement reward letters with high-interest parent loans.” While the amount students can borrow each year is limited, parents can theoretically borrow the full cost of their studies, and parents are not eligible for most income- based repayment plans their children make.
It can also work after graduation: instead of having loans in your own name, you can offer to help them pay off after they start working. I can’t think of a more lavish prom gift than this one.
Take advantage of 529 plans
This option obviously requires some planning, but opening and funding 529 is a much better financial move than getting loans to pay for higher education. You can read about them here and here .
A similar option is the Coverdell account , which is similar to the 529 account , except that the contributions are tax-deferred, making it essentially a trust. Although your tax bill will be higher, your child will have more freedom to use the funds as they see fit when they reach a certain age.
Consider Private Loans First
While it may sound counterintuitive, Parent PLUS loans can have much higher interest rates than some private loans: US News reports that PLUS loans have an interest rate of seven percent, compared to 4.5 percent for students, and a processing fee at the rate of 4.3 percent. So go shopping . (On the other hand, students have a lot more protection with federal loans than with private loans, and should heighten those opportunities before making purchases with private lenders.)
One note: Parent PLUS loans will be repaid in the event of death or disability, or will meet an income-driven repayment plan, which does not apply to private loans.
Alternatively, some states, such as Massachusetts , also offer loans to residents.
Use your Roth IRA funds
If you haven’t set up a 529, the Roth IRA can be a great alternative funding source. Roth has many positive qualities, one of which is that there is no early withdrawal fee if the money is used for educational expenses such as tuition or room and board.
Refinance PLUS Parent Loans in your child’s name
If you have taken out a PLUS loan and are having trouble repaying it, you can refinance it in your child’s name. Technically, the Department of Education does not allow you to transfer debt, but if you refinance, you can get around that.
To do this, your child will need to apply for a new loan. “Although the current loan is in the name of the parent, the child must complete the application with their information including income, school and degree,” said Phil DeGeese, CommonBond Marketing Director, Student Loan Hero . Then you will need to find a lender who will serve him.
This is not the best option, but it can be a solution if you really have problems with paying off the loan, and your child is comfortable getting a job.