I loved watching the movie Dumb & Dumber. I’ve always enjoyed what I like to call “stupid humor” movies. Those are movies that take many of the well-intentioned things we all do in everyday life and show how comical and well, dumb, many of them can be.
Which brings me to Parent PLUS student loans. 
In my Dumb & Dumber theme, Parent PLUS loans are dumb… only to be outdone possibly by co-signing a private student loan… which is even dumber.
Parent PLUS loans are made by the government under the Federal Direct Loan Program administered by the U. S. Department of Education. They are made directly to the parent of a dependent student. They are intended to help parents pay for education expenses for their children up to the cost of attendance minus all other financial assistance.
They are student loans… but worse.
They pile even more debt on top of what the student is already borrowing… but it is loaned directly to the parent. It makes it even easier for both the student and the parent to rack up huge debts that could easily last a lifetime.
A Loving Act… Gone Bad
Taking on this student debt as an adult is a well-intentioned act, based in love and concern and hope for our children. But it is foolish and unwise financially.
In fact, Parent PLUS loans are arguably one of the most dangerous forms of student loans you could get yourself in to (only to be outdone possibly by co-signing a private student loan).
Rachel Fishman wrote an article at Higher ED Watch, a blog of the New America Foundation that talked about how dangerous Parent PLUS loans can be. The article is titled Parent PLUS Loans a Minus for Many.
Here are a couple very important quotes from her article.
“As college costs have skyrocketed, one thing is clear: Parent PLUS loans have increasingly become a giant minus for many families. According to a recent article in The Chronicle of Higher Education, the government issued $10.6 billion of Parent PLUS loans to approximately one million families last year. That’s nearly double the amount of borrowers and an increase of $6.3 billion in inflation-adjusted dollars since 2000.”
The student loan mess has been getting much more media attention over the last few years. It started out innocently enough… like having a small pet snake in a nice, safe, escape-proof tank in your bedroom. Great concept, but student loans are not small, innocent garden snakes.
These are amazon-like pythons that grow into huge, animal eating behemoths.
Little attention has been put on one component of the sad and dangerous tale of student loans – Parent PLUS loans.
“Parent PLUS Loans, which are taken out by parents on behalf of their children, act most like a private loan compared to other federal loan options. PLUS loans have a relatively high fixed interest rate of 7.9 percent. Additionally, parents do have to meet a minimal standard to qualify—they cannot have adverse reporting on their credit history and have to pass a “credit check.” But this credit check is different than the check that is normally done for a private loan. It is quick, simple and does not consider income or ability to repay the loan.”
Did you read this in the quote above “…does not consider income or ability to repay the loan”? The government checks your credit to see if there are certain negative traits on there. But it does not check your income, or what other debts or obligations you might have as part of deciding whether to lend money to you.
That basically means they really don’t care how much you make. They don’t care whether your income is sufficient to make it reasonable for you to repay the loan.
A student loan made to a student does not consider their ability to repay either. But the government’s logic is that the loan they are making to the student will help them get an education that will allow them to repay the loan. I disagree that lending money on those conditions is smart or wise, but at least the debt is sitting on the person who will be attending college… the person who stands to benefit from the education.
With Parent PLUS loans, they are loaning money to you as the parent, not the person going to school.
You are not the one who is supposedly going to get the benefit of the education and create a higher income in the future to repay the loans. Ultimately, your ability to repay the loan will be determined by your financial position and your income.
But they don’t care what your income is or what your financial position is when you apply. They will loan you the money anyway… whether they think you can repay it or not. What? Why would they loan large sums of money without regard to whether the person receiving the loan can pay it back?
“Unlike other federal student loans, PLUS loans have no cap—parents can borrow up to the full “Cost of Attendance” (COA) for the institution. These loans aren’t dischargeable in bankruptcy and don’t normally qualify for repayment options designed to help struggling borrowers, like Income-Based Repayment. As a result, families who find themselves in over their heads on PLUS debt can be forced to make difficult choices, like postponing retirement.”
Parent PLUS loans are more like payday lending than responsible, mature, common-sense lending.
It can trap you in debt at a time that should be more and more enjoyable and rewarding, not a time to be dragged down by a form of debt that is virtually impossible to escape. A form of debt where the government can garnish your wages without a court order, seize your tax refund, withhold a portion of your social security, and unleash collection agencies that make loan sharks look like sweet little angels.
“The data reported by the Chronicle are probably the bellwether of a developing PLUS loan crisis. The problem can’t be completely solved until college costs are reined in, which may never happen, especially if we keep handing out easy cash in the form of PLUS loans to institutions (chicken, meet egg!).”
Parent PLUS loans make it tempting to choose a very expensive school for your child. That is one reason college costs will not be “reined in” anytime soon.
These loans are much more dangerous than a student loan made to a student. At least those loans provide some protections if life does not turn out exactly as an 18 or 19 year old planned (wouldn’t it be nice if everything we planned turned out just like we wanted it to)!
Your retirement should be about wisdom and freedom. Not becoming a slave to a nasty form of debt.
Avoid Parent PLUS loans at any cost. You will be so glad you did.