GOLDEN VALLEY, Minn. - As the cost of college spirals upward and median family income falls a loan program called Parent Plus has become indispensable for increasing numbers of parents desperate to make their children's college plans work.
For families struggling to finance higher education costs, the relatively easy access to 'PLUS' loans may seem to be the perfect solution to fill the gap, potentially at their retirement's peril.
Dan Ament, Financial Advisor with Morgan Stanley Wealth Management in Wayzata spoke on KARE 11 Sunrise about a cautionary perspective.
PLUS Loans Grow - Last year the government disbursed $10.6 billion in Parent Plus loans to just under a million families. Even adjusted for inflation, that's $6.3 billion more than it disbursed back in 2000, and to nearly twice as many borrowers
An easy source of cash - A joint examination by ProPublica and The Chronicle of Higher Education has found that Plus loans can sometimes hurt the very families they are intended to help. The loans are both remarkably easy to get and nearly impossible to get out from under for families who've overreached. When a parent applies for a Plus loan, the government checks credit history, but it doesn't assess whether the borrower has the ability to repay the loan. It doesn't check income. It doesn't check employment status. It doesn't check how much other debt - like a mortgage, or other student-loan debt - the borrower is already on the hook for.
Different than other Federal loans - Unlike other federal student loans, Plus loans don't have a set cap on borrowing. Parents can take out as much as they need to cover the gap between other financial aid and the full cost of attendance. Colleges, eager to boost enrollment and help families find financing, often steer parents toward the loans, recommending that they take out thousands of dollars with no consideration to whether they can afford it.
Bankruptcy is NOT a solution - When it comes to paying the money back, the government takes a hard line. Plus loans, like all student loans, are all-but-impossible to discharge in bankruptcy. If a borrower is in default, the government can seize tax refunds and garnish wages or Social Security. What is more, repayment options are actually more limited for Parent Plus borrowers compared with other federal loans.
PLUS loans do serve a purpose - Of course, Parent Plus can be an important financial lifeline - especially for those who can't qualify for loans in the private market. An iffy credit score, high debt-to-income ratio, or lack of a credit history won't necessarily disqualify anyone for a Plus loan. Applicants are approved so long as they don't have an "adverse credit history," such as a recent foreclosure, defaulted loan, or bankruptcy discharge.
Be realistic about the college debt you and your student assume - There is no doubt in my mind that it pays to earn a college degree. But .... As you evaluate and attempt to select the right higher education institution for your child; be mindful of considering in detail how you are going to pay for it and the debt you will assume for that elusive degree. Will your student's likely career path meet the financial obligations in paying off a mountain of debt? Many American's are now looking back wondering why they didn't ask that question themselves.
(Copyright 2012 by KARE. All Rights Reserved.)