WSJ article out today warning of the dangers of Parent PLUS loans. I thought this was particularly pertinent as high school seniors pore over their financial aid award letters before making a May 1st decision. Here’s the lede:

Millions of U.S. parents have taken out loans from the government to help their children pay for college. Now a crushing bill is coming due. Hundreds of thousands have tumbled into delinquency and default. In the process, many have delayed retirement, put off health expenses and lost portions of Social Security checks and tax refunds to their lender, the federal government.

What makes this even more disconcerting is the financial aid “packaging” that often occurs where the PLUS loan becomes the plug figure used to get costs of attendance to balance out with sources of funding. I have seen aid award letters with upwards of $30,000 in Parent PLUS loans to “fill the gap.” The other problematic situation that arises with these loans is the “don’t worry parents/guardians, take out the loan and I will pay you back…:”

Consumer counselors are hearing from borrowers who make as little as minimum wage but borrowed tens of thousands of dollars and now can’t repay. Some expected their children to get good jobs and pay off the loans for them. In many cases, their balances have grown with interest—most Parent Plus loans issued over the past decade carried rates of between 6% and 8%—and thousands of dollars in fees the government charges when borrowers default.

Good opportunity to have your students evaluate their aid award letters and circle the Parent PLUS loans they see.

• What is the size of the Parent PLUS loan on their award package?
• What is the interest rate on a Parent PLUS loan? What are the fees on a Parent PLUS loan?
• When does interest start to accrue on a Parent PLUS loan?
• Multiply the PLUS loan amount by 5.0 to provide an estimate of how much total PLUS loan borrowing you will need before graduation.
• Go to this student loan calculator to determine what the monthly payment on the Parent PLUS loan would be assuming a standard 10 year repayment period.
• Does this monthly payment seem reasonable? Provide this information to your parents.

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Check out the NGPF Fine Print: Financial Aid Package

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.