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.
We at College Coach don’t want any family to feel “trapped” by college loans. We work with parents to help their children access a top-notch education at a price they can afford. If a family chooses to make borrowing a reasonable part of their college payment plan, we make sure they maximize the most favorable student loans before the parents even consider borrowing themselves. We agree with this article’s author that parents need to enter into college loan agreements with eyes wide open and carefully consider the amount of education debt that they can afford to take on. But we must point out some factual errors in the author’s argument that the government’s parent loans are inherently more hazardous than their counterparts in the students’ names. These errors make student loan repayment appear, frankly, a little easier than it actually is, while giving the impression that parent loan repayment is more problematic than it actually is.
Is Pay As You Earn as good as it sounds?
The article states that “federal [student] loan rules limit loan payments to no more than 10 percent of their income.” An oversimplification of the student loan repayment process, this statement is referring specifically to the Department of Education’s Pay As You Earn (PAYE) student loan repayment plan, one of many repayment plan options available to some (but not all) student loan borrowers. Only “new federal loan borrowers” experiencing a “partial financial hardship” in paying back their federal Direct Loans can take advantage of PAYE repayment, and even then it is not automatic. Student borrowers must actively request that their loans be put on the PAYE repayment plan. Without borrower action, student loans are put by default on a fixed ten-year repayment schedule, with monthly payments often far exceeding 10 percent of borrower income.
Parents have access to adjustable loan repayment terms too
The article goes on: “At least the students’ repayment terms are flexible if they don’t have much income. Parents get no such consideration… There’s no deferral or forgiveness [of parent PLUS Loans], even if a parent loses a job or becomes ill.” These statements are simply untrue, and make parent loan repayment appear more onerous than it truly is. Though Income-Based and PAYE repayment plans are only offered to students, parents borrowers in need of repayment flexibility can often choose among Standard, Graduated, and Extended repayment schedules, as well as (depending on their lender) Income-Sensitive or (in limited circumstances) Income-Contingent repayment plans. Parent PLUS Loans can be deferred for many reasons, including the student’s or the parent’s enrollment in school, or during periods of unemployment or other economic hardship. PLUS Loans can also be cancelled in the event of the death or permanent disability of the student or parent borrower.
We agree that students should maximize their federal loan eligibility before parents consider borrowing, and that parents need to think very carefully about the debt burden they are willing and able to bear to pay for their children’s education. But we also believe that parents should make these borrowing decisions based upon complete and accurate loan information.
Subscribe to College Coach’s The Insider blog to be kept up-to-date on the latest college planning news from true college admissions and finance experts.