By Becca Craig, CFP
In pre-pandemic times, the end of March marked a significant milestone for the college-bound as most universities aimed to get thousands of anxious students to submit their regular admissions decisions. And yet, even the college admission cycle wasn’t immune to the effects of COVID-19, as many colleges have been have announced that they will be extending their regular decision-making period.
Coupled with the fact that the latest stimulus package included major changes to the federal student funding process, the path to college education for the 2025 class and their families could look very different. Legislative Critic argue that replacing the expected family contribution (EFC) with the Student Aid Index (SAI) will significantly reduce the level of financial support for middle- and high-income families who have multiple students enrolled in college at the same time.
Given the unexpected and sudden change in skills in development aid, many families are likely to need to seek additional sources of funding to pay for higher education costs. For anyone with loved ones approaching college age, now is definitely a good time to consider a crash course on Parent Plus Loans.
As with any major financial decision, you should read up on the pros and cons of Parent Plus loans and understand how they could affect your other financial priorities and goals. But to get you started, here’s a look at some of the basics.
Parent PLUS Loans
The office of Federal Student Aid offers Parent PLUS Loans for parents who borrow on behalf of their student. Parents can borrow up to the full cost of their child’s schooling minus any financial support their child has already received. Parent PLUS loans require that the borrower pass a credit check, which must be free of any bad credit history.
Unlike other federal student loans, Parent PLUS Loans carry the additional cost of a commitment fee. Starting October 1, 2020, a commitment fee of 4.228% will be charged for all Parent PLUS loans. For example, if a parent borrowed $ 50,000, they’ll pay a commitment fee of $ 2,114.00. The additional fee is included in the loan amount.
Last but not least, the repayment of the Parent PLUS loan begins immediately, unlike student loans, which are only due six months after graduation. It is possible to apply Credit deferral Interest on Parent PLUS loans will continue to accrue while a student is in school even if formal payments are suspended.
Understand interest rates
Borrowers who added new ones Parent PLUS Loans after July 1, 2020, with the historically low interest rate of 5.3%, you received a significant reduction compared to the interest rate of 7.08% offered in the previous year While these rates are a welcome opportunity for new borrowers, they do not apply to personal student loans or existing federal student loans.
The interest rates on the government student loan for the upcoming school year are set by the government. The interest rate is calculated based on the 10 year treasury note auction, plus an additional different percentage depending on the type of loan and whether the loan is given to a student or graduate student. The low 5.3% rate applies to new federal student loans granted between July 1, 2020 and June 30, 2021.
The important thing is that federal student loan interest rates are fixed for the life of the loan at the time and interest rate you take it out. Unlike classic loans, such as a mortgage or car loan, which can be refinanced (relatively) easily at a lower interest rate, this is not the case with Parent Plus loan.
Without a government refinancing option, Parent PLUS loan holders might be tempted to turn to a private loan for refinancing as the carrot is the option to get a lower interest rate. However, consider doing a cost-benefit analysis before pursuing this option. The personal loan tradeoffs include lost protections like pandemic payment suspension and income-based repayment plans. The inclusion of Parent PLUS loans in the proposed student loan repayment plans is a subject that is still up for debate.
Bundeseltern PLUS loans cannot be transferred to the student
Bundeseltern PLUS loan not transferable to the student. A parent who borrows for the benefit of a child’s education is solely and legally responsible for repaying the loan. However, parents have the option of consolidating the Eltern-PLUS loan into a direct federal loan or refinance the Eltern-PLUS loan into a private loan in the child’s name as soon as they can meet the qualifications. (If the student does not qualify, co-signing a private refinancing loan is also an option to meet the lender’s approval requirements for co-signers.) Refinancing federal loans into private loans on behalf of the student eliminates the possibility of income-based repayment plans and Lending programs.
Consolidated state PLUS loans are limited to certain types of repayment plans and waiver
While borrowers get a plan (instantly) at the start of the term, they can Change repayment plans at any time without additional costs.
Income-based repayment is the only income-based repayment plan that Parent PLUS loan borrowers can use. To be eligible, borrowers must first Combine your PLUS loans into a direct consolidation loan. Income-based repayment reduces the monthly federal student loan payment to either 20% of disposable income, or to the amount you would pay on a fixed 12-year payment plan, based on income. The remaining loan balance will be waived after 25 years if you still make payments at that time.
Strict requirements must be met in order to be granted the Eltern-PLUS-Loan
Similar to federal direct student loans, a parent PLUS loan can be dismissed if the borrower or student dies, if the borrower (not the student the money was loaned on) becomes completely and permanently incapacitated, or on rare occasions, if trapped is bankrupt. A Parent PLUS loan can be in whole or in part in one various other circumstances.
Parent PLUS loans qualify for PSLF when consolidated
Parent PLUS loans are eligible for forgiveness under the Public Service Loan Forgiveness (PSLF) program if they are first consolidated with the Federal Direct Consolidation Loan Program, meet the requirements of the PSLF program and borrowers then apply for the forgiveness program. Here’s the catch: the qualification is based on the borrower’s employment (and a variety of additional requirements), not the student’s employment. Parent PLUS loan holders employed by a nonprofit, public hospital system, government, or any of the additional 14 skilled employer types are eligible by virtue of their own employment regardless of their student’s main or post graduate employment.
For example, let’s say Jane took out Parent PLUS Loans to pay for her child’s basic education. Jane is a social worker and full time employee (30 hours per week) at a 501 (c) 3. Jane, as a borrower, could sign up for and receive her Parent PLUS Direct Loan with PSLF even if her child Billy eventually found employment in the private sector or small business.
That being said, the rule would still apply if we turned around Jane and Billy’s employers. For this example, let’s say Jane is still a borrower but works as the chief investment officer for a private hedge fund company. If Billy had a social work degree and hired from the same 501 (c) 3 from the previous example, Jane’s Parent PLUS Loan would not qualify because her employer does not qualify for PSLF.
It is critical that households consider government lending programs such as PSLF when determining the owner of a loan. The consumer finance bureau It is estimated that more than a quarter of working US citizens are eligible for PSLF So it’s worth thinking about whether you currently own or are considering purchasing Parent PLUS loans. However, if a student has a very strong desire to perform a public service, it may be worthwhile for the student to own the loan (and any forgiveness).
Parent PLUS Loans are widely used to bridge the gap between the total annual cost of attending college and a student’s financial support package. While fully funding the college’s expenses is a tempting quick fix, you should also explore other additions such as work study programs, scholarships, or grants.
If your loved one is currently in college, call the grant office of your chosen school to discuss your grant package for the next year, especially if a student’s financial situation has recently changed.
Higher education is an investment that requires students and parents alike to be wise with borrowing and understand all of its options. Although Parent Plus loans can be part of a successful strategy, as with all financial decisions, they must be individually assessed for the best for the whole family.
About the author: Becca Craig, CFP®
As a consultant at Strategic Wealth of Buckingham, Becca Craig, ABA, CFP®, combines her wealth management experience with her background in public policy and risk management to better educate investors with a holistic approach to financial wellbeing. As an advocate and advocate of evidence-based planning, Becca enjoys making people’s money work for them – not against them – so they can focus on the people, efforts, and causes that matter most to them.
Important Notice: The opinions expressed by the featured authors are their own and may not exactly reflect those of Buckingham Strategic Wealth®. This article is for general information only and is not intended as specific financial, accounting, legal, or tax advice. Individuals should speak to qualified professionals based on their individual circumstances. The analysis contained in this article may be based on information provided by third parties and may be out of date or otherwise replaced without prior notice. The information provided by third parties is believed to be reliable, but its correctness and completeness cannot be guaranteed. IRN-21-1986
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