For parents who want to make sure their children graduate college debt-free, taking out loans themselves might seem like a better option. But a recent article by The New York Times highlights the problems with the federal Parent PLUS loans that can be made without consideration of the borrower’s ability to repay, and with little protections if they can’t.
“The parent PLUS loan does not come with an attempt to understand the parents’ ability to repay,” says Rachel Fishman, deputy director of research for the higher education program at New America, a nonprofit research and policy group, in the article. “When the federal government is saying you can borrow this loan, and an institution is saying you can borrow this loan, that leads someone to believe that the federal government has done their due diligence. They have not.”
There were 3.6 million loan recipients at the end of 2020 with an accumulated $101 billion in Parent PLUS loans, an increase of 40% compared to 2014. From 2017-2019, the average parent borrowed just under $25,000 in Parent PLUS loans, though some people took on significantly more debt.
One of the biggest issues with these loans is when borrowers forbear, defer, default or consolidate the interest that accrues is capitalized and added to the principal, which only makes payments higher.
“Things really spiral out of control for borrowers who face repeated economic or financial ups and downs, especially when they have high-interest loans like PLUS loans,’’ says Adam Looney, a finance professor and the executive director of the Marriner S. Eccles Institute for Economics and Quantitative Analysis at the University of Utah in the article.
“For a financially secure, high-income parent that makes automatic payments, the loans work fine. But if anything bad happens, it’s a disaster.”
And 2020 has shown that anything bad can happen.
-- Hollie Deese