Forecasts from several leading reports suggest that student loan debt is not only a mounting crisis for young borrowers, but is also ringing alarm bells for their parents. More than 3.3 million people have existing parent PLUS loan debts. In fact, a disturbing trend of older borrowers having an offset placed on their Social Security payments for old student debt is on the rise, according to the US Government Accountability Office. 7,300 people paid a portion of their Social Security to student loan debt. While nearly half of these borrowers (age 50 or older) are paying an offset on disabilities-related Social Security versus retirement-related Social Security, they have almost all held their student loans for more than 20 years.
This data is just the tip of the iceberg when it comes to exploring how the student loan crisis impacts the generation of people who are currently sending their children to college. Many adults now considering taking on parent PLUS loans for their children are still making payments for their own student loan funding, which represents an even bigger crisis waiting around the corner. Just as they are reaching the point in their lives where they should be finally paying off their own debt, they are becoming saddled with an additional average of $22,000 per household.
The average family who considers taking on parent debt for student loans has already exhausted other alternatives for funding such as scholarships, financial aid, and federal loans in the name of the student. Unless something happens to break this cycle, these students may find themselves in similar situations 20 years from now. With student borrowing increasing as well, there doesn’t seem to be an end in sight for this cycle of debt.
As parents struggle to take out additional debt for their children, while continuing to make payments to their own debt, they are also turning to face retirement in the coming years. The projected number of Americans who do not have enough savings to make it through retirement is a bit scary, and instead of positioning themselves to save money and prepare, more and more parents have to pay back student loan debt instead.
One of the biggest reasons why parent PLUS loans are becoming such a problem is that the algorithm used by the government to grant these loans doesn’t consider how much of a monthly payment you can comfortably make. Different kinds of debt, such as a mortgage payment, will calculate how much room you have in your current budget to take on new debt and limit the amount of money you can borrow accordingly.
Federally-funded parent PLUS loans do not use this same formula, making it easy for a family to quickly borrow more than they can afford to pay. Defaulting on a student loan puts you in the unique position of holding unsecured debt that you can’t file bankruptcy on for most borrowers. This means you are stuck with this debt, come what may or retirement.
Parents want to be able to provide their children with the best footing possible, but putting themselves at risk of retiring into poverty will ultimately impact their children with a much greater burden down the road. If your child maxes out student loans, financial aid, and scholarships and still requires additional funding for his or her education, it might be a smarter option to pursue a less expensive path to graduation.
Options for PLUS Loans
While you can’t do much to discharge a parent PLUS loan and you can’t transfer the amount owed to your child’s name after graduation, there are some options for saving money on repayment.
- Student Refinancing: Although you can’t directly transfer the balance of the PLUS loan to your child’s name through the Department of Education, if your child has built an income and established a history of credit, then they may qualify for lower student loan refinance rates. By securing private lending and paying off the amount owed on the PLUS loan, your child will be responsible for the amount in a new account that has no attachment to your credit.
- Parent Refinancing: If your student isn’t able to take on the loan amount quite yet, you can still refinance parent PLUS loans for potentially lower interest rates or more favorable loan terms.
- Repayment Options: The advantage to keeping your federal loan and not seeking to refinance through a private company is the wide range of payment options that you can access with a federal loan. Consider taking the time to see which plans you qualify for and you may discover loan terms that make private loan funding seem less attractive.
Author: Jeff Gitlen
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