Part Two: If parents are denied a Parent PLUS loan, what are their options?
Last week, we outlined the basics of the Federal Parent PLUS loan, a great option for many families, but an option that might not be available to all. If you’ve been denied a PLUS loan, you first have the right to appeal the decision by documenting extenuating circumstances (Tweet this Tip). For more information, see https://studentloans.gov/myDirectLoan/whatYouNeed.action?page=credit.
The student’s other parent or stepparent also can apply for the Parent PLUS Loan which will trigger another credit check for the new borrower to determine his or her eligibility. Finally, the original borrower also has the option to utilize an endorser to cosign the loan. The endorser must pass the credit check, and he or she will be responsible for repaying the loan if the borrower fails to make payments.
Part One: What is a Federal Parent PLUS Loan, and how do I get one?
Now that you’ve deposited at a college, it is time to figure out how you are going to pay the bill. One of the many ways parents can help their students pay their college costs is with a Federal Parent PLUS Loan. As the name suggests, this is a loan where the parents are the borrowers. The PLUS Loan is a federal loan that provides borrowers with protections not often found in the private loan market, including several attractive repayment options, fixed interest rates with predictable payments, and deferment and forbearance options during short term hardships.
In recent years, the Parent PLUS loan has offered a fixed interest rate. It is currently based on the Ten-year Treasury Note plus 4.6 percent with a cap of 10.5 percent. The current interest rate is 6.41 percent and will be reset on July 1st for the 2014-2015 school year. Borrowers should borrow for the entire academic year, keeping in mind that they will need to reapply each year. A credit review is done each year because borrowers are not automatically approved for the entire cost of the education.
Yesterday brought breaking news for student loan borrowers: we now know what Federal Direct Loan interest rates will be for the 2014/15 school year! Though rates are officially set for the upcoming academic year based upon the 10-year Treasury Note rate in effect on June 1st, the U.S. Treasury Department just held its last scheduled Treasury Note auction prior to that June 1st deadline, giving us a sneak preview of next year’s rates. For loans disbursed between July 1, 2014 and June 30, 2015, interest rates will be as follows:
Unfortunately for borrowers, these rates represent a 0.8% increase over last year’s rates. See last summer’s blog post regarding how federal education loan interest rates are set, and note that these new rates only apply to loans disbursed during the 2014/15 academic year.
Is Student Loan Reform Good News for Federal Loan Borrowers?
If Senator Elizabeth Warren of Massachusetts gets her way, there will be good news on the horizon for federal student loan borrowers. Warren recently announced on her blog that she will be introducing new legislation to allow graduates with high interest rate student loans to refinance those loans at rates “at least as low as those now being offered to new borrowers in the federal student loan program.” Warren points out that “when interest rates are low, homeowners can refinance their mortgages. Big corporations can swap more expensive debt for cheaper debt. Even state and local governments have refinanced their debts.” But student loan borrowers cannot currently refinance their debt at prevailing interest rates through any existing federal program. The current federal student loan consolidation program allows borrowers only to lock in a weighted average of all of their existing interest rates, not necessarily get themselves a lower interest rate.
Reader Beware: Clearing up Student College Loans for Parents
In our developing “Reader Beware” series, College Coach finance experts seek to correct inaccurate college finance information shared in the popular press. The goal is to help families make well-informed college finance decisions rather than relying on assumptions, half-truths, and misinformation picked up from inexpert sources. In this second installment of the series, we take a look at a recent article in the St. Louis Post-Dispatch entitled College Loans Can Trap Unwary Parents.
In part one of this blog, we explored some of the reasons why using a 401k/403b loan to pay for college can be a risky strategy. In part two, we will talk about some of the additional challenges of that strategy and some alternative options.
The Five Year Repayment Period and Paying for College
The main benefit of borrowing is that the borrower can reduce the individual payment amounts by making more payments over time. People who borrow do so because either they do not earn income fast enough or do not have enough money left after they pay their other bills to meet the expense with current income. The five year repayment period on a 401k/403b loan is short for a loan, and these loans do not significantly reduce the size of the payments the borrower needs to make.
Most companies allow their employees who use retirement plans like 401ks and 403bs to borrow from these accounts to pay for things that occur before the employee retires. These are not considered withdrawals, and the employee pays the loan back, with interest, over a short period of time. Employees like the idea of “borrowing from myself and paying myself back” and the ease of setting these loans up. However, a 401k/403b loan is a risky college finance strategy that does not always work. In part one of this blog, we’ll look at a few of the reasons why.
How do 401k/403b loans work?
Employees who want to set up a 401k/403b loan contact their 401k/403b manager. The manager sets the repayment terms, which include a five year repayment period (ten years if the loan is to purchase a primary home) and the interest rate. Employees pay the loan back through payroll deduction over 60 months.
Parents often tell College Coach’s Saving for College experts that all, or a large part, of their plan to pay for college involves loans or withdrawals from their 401ks or 403bs. We try to help them find an alternative college finance strategy, as using these accounts to pay for college can be expensive and ruin a parent’s retirement security.
A brief reminder: what is a traditional 401k/403b?
When you fund a traditional 401k or 403b, you allow your employer to take some of your paycheck and deposit it in your retirement account. You don’t have to pay taxes on the income that you save. This is called pre-tax salary deferral. You invest the deposit in assets that you hope will grow in value, and you do not have to pay tax on interest, dividends, or capital gains that are earned within the account. This is called tax-deferred growth. When you do withdraw funds from your traditional 401k or 403b, you must pay income tax on those funds.
It seems hard to pick up a newspaper these days without running into advice from College Coach finance expert, Robert Weinerman!
In an article in this weekend’s Wall Street Journal entitled “August Is Time for a Financial Reboot,” Robert shares his insight for parents of high schoolers on early college financial planning, including scholarship searches, financial aid calculations, and asset allocation for college savings.
And in today’s US News and World Report, Robert offers his perspective on recent student loan legislation in an article entitled “New Student Loan Deal Good, and Bad, for Borrowers.”