Presume that you are about to retire from your job in not less than three years and you are having a child who has been out of college and currently having a successful career. The question is how will you be able to meet up and close the thousands of dollars you still owe on behave of your child’s college bills.
This is typically a state of many parents who take out federal direct PLUS loans. In as much as loans become a saving grace of many parents so they could send their child to school with today’s education costs, they are also disadvantages that pose risks to the finance of and their retirement at risk.
What You Should Know About Direct PLUS Loans –
- Do you know that parents can take out PLUS loans (federal loan) to cover for their child’s college costs?
- Do you know that it is the responsibility of parents to pay off PLUS loan?
- There is no room for income-driven repayment plans just like you may find in student loans.
- PLUS Loans leverage borrowers with large borrowing limits, availing that you can take much debt.
How PLUS Loans Work
PLUS is an abbreviation that stands for Parent Loan for Undergraduate Students. You may be wondering about the graduate program. There is also a program for them called the Grad PLUS program for graduate and professional students borrowing by themselves.
The Parent PLUS program is a platform where parents borrow money for dependent students to pay any cost of their program that is not covered yet financially, just like Pell Grants.
PLUS Loans generally have fixed interest rates for the life of the loan. The highest range expected to repay PLUS loans is completely 10 years, but there is also an extension that can lingual payment plan up to the length of 25 years term. Since this is a federal loan, the suspension of interest on student loans also reflects this loan during the period of the Coronavirus crisis, (by President Trump – March 13, 2020, to Sept. 30, 2020).
Parent PLUS loans state that the financial responsibility is of the parents, not the student. The burden cannot be transferred to a student even though he/she is a disposition that can be handled.
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Dangers of taking out direct PLUS loans are as follows:
There is no room for complete income-driven repayment plans
On often note, the federal government offers four different income-driven repayment plans four income-driven repayment plans for student loans but it is not so here. Generally, the monthly payments are limited to the percentage of the student’s discretionary income -that is by 10%. Now the consistency in paying this for a certain number of years such as 20 or 25 years can cause the remaining loan balance to forgive.
Parent PLUS loans are designed with one out of the four income-driven plan know as ICR- Income-Contingent repayment. Your eligibility will be considered after the parent has consolidated their parent loans into a federal direct consolidation loan.
ICR plan limits payments to 20% and less of discretionary income over a term of 25 years.
There is no room for Automatic Grace Period
Unlike what we use to have in a student loan. Students are typically given six months grace period. After graduation to start repayment. It is not so in PLUS loans. Thus, the repayment period started. Immediately after the child or school receives the fund. Parent borrowers apply to the loan servicer. To request a deferment while the student is enrolled at least half-time and for six months after they leave school.
Grace to borrow more than you need is high
Since there is no check on parent’s income or debt-to-income ratio, you may be led to borrow more than you need knowing that you won’t be policed. They just check on your credit report only and it must be an adverse credit history.
The school sets the loan amount based on its cost of attendance just after the loan has been approved and they will vary by school. It is usually more than what students can pay and so, they require borrowing more than their child’s needs for college. Having other outstanding debt will pose dangers to your finance.
It is very impossible to get out of it
There is no escape on a Direct PLUS loan and you worse the case by not making payment till it gets to default. Even the case of bankruptcy cannot save you or cancel the debt. You may be withheld from your Social Security benefits and tax refunds until the debt is repaid. This is how bad the situation can be. You should be wise to contact your loan servicer for advice before you approach the days of default. Even in case of permanent disability, a PLUS loan balance cannot be forgiven.