The Problem with Parent PLUS Loans
What segment of education borrowers is growing the fastest? Parent PLUS loan borrowers. And it's not just the number of borrowers that's increasing; outstanding debt balances for Parent PLUS loans are growing faster than any other segment of the federal student loan portfolio. From 2014 to 2023, the number people with outstanding Parent PLUS loans grew by almost 20% to 3.8 million, while the average loan balance held by these borrowers grew by almost 50%, from just over $20,000 to almost $30,000.
Parent PLUS loans have a huge advantage (and disadvantage) over direct student loans: Parents can borrow up to the full cost of attendance minus scholarships, whereas student borrowing is capped at annual amounts beginning at $5,500 and going up to $7,500.
Parent PLUS loans aren't a great deal. The interest rate is 2.55% higher than the rate on the direct student loan. This year it's 8.05%, compared with 5.5% for a student loan. Origination fees are higher too: 4.228%, meaning that borrowing $10,000 will cost you $423 upfront. Compare that with 1.057% for the direct student loan and you can see where you should start borrowing.
The costs are only part of the problem. There are several other problematic aspects of Parent PLUS loans:
Unlike students, who are earning degrees that should improve their income prospects, parents borrowing for their children's education can't expect significant changes in their own earning power coming from that borrowing. In fact, many parents' incomes decline after their students finish college due to retirement-- which is often not by choice. The result? Recent statistics aren't available due to the student loan payment pause, but in 2015 about 114,000 Social Security recipients had their benefits garnished for student loan payments.
Parents who borrow for college are often borrowing to finance multiple children's educations, meaning they'll wind up with a multiple of what each child borrowed. That "manageable" $3,000 annual shortfall in your budget, multiplied by four years and two more siblings who expect the same choices, is suddenly $36,000 plus interest. And if that $3,000 is accruing interest at 8.05% per year while the student is in school, it will be quite a bit more by the time they graduate.
While the Parent PLUS loan program was originally intended to help higher-income families deal with the cash flow challenges of funding college, times have changed. Now low income families, especially Black and Latinx families, are taking out disproportionate amounts of Parent PLUS loans, largely due to lack of other resources to pay for college, and becoming trapped by unmanageable payments.
Because of large balances and high interest rates, Parent PLUS borrowers have a difficult time making headway on their loan balances. A recent study showed that after 10 years, Parent PLUS borrowers still owed 55% of what they had borrowed on average; after 20 years, more than 1/3 of the loan balance remained-- largely because these borrowers have a hard time keeping up with payments. What does that balance look like? Suppose that parent above who borrowed $3,000 each year was 50 when their last child entered college. At age 70, they'd still owe close to $15,000.
All that being said, Parent PLUS loans are usually better than private alternatives. That's because parents get many of the same loan protections as do students, including income-based repayment programs-- though not the most favorable ones-- and hardship provisions. And parents employed in the public or nonprofit sectors can consolidate PLUS loans into direct consolidation loans and take advantage of Public Service Loan Forgiveness. However, they need to continue in qualifying full-time employment for 10 years after repayment starts, which is to say, after the youngest student's college graduation.
Before considering Parent PLUS loans, or any other loan beyond the direct student loan, it's crucial that you know your path to repayment. Perhaps you're anticipating some windfall in a few years' time that could be used to pay them off. Maybe you just need help with cash flow in years when you have multiple college students. A more important consideration would be, what other pathways are open to your student that could avoid having you take out a Parent PLUS loan in the first place?
