Parents are increasingly shouldering the student loan burden and risking their financial health to do it, according to a new report from the Brookings Institution, a nonprofit public policy organization.
In its analysis of debt taken on through the federal parent PLUS loan program, Brookings found that:
• Balances owed by parents have more than tripled over the last 25 years.
• 1 in 11 parent borrowers owes more than $100,000.
• Default rates have increased sharply.
• Fewer parents are making headway in paying off the debt.
Parent PLUS loan borrowers now collectively owe nearly $87 billion, or 6% of all outstanding federal student loans, according to federal data.
PLUS loans for parents are different from the federal loans taken out by undergraduate students. For example, there is no cap on the amount that can be borrowed, other than the cost of attendance minus other financial aid. PLUS loans require a credit check, and they have higher interest rates and fees. They also come with fewer repayment options.
Repayment struggles could lead parent PLUS loans to default, which results in consequences ranging from ruined credit to garnished pay.
Where a student attends school matters
The worst rates of repayment are among parents whose children attend for-profit schools. Most of the for-profit schools with low repayment have been shut down or the subject of lawsuits regarding misleading practices, says Adam Looney, director of the Center on Regulation and Markets at Brookings and the co-author of the report.
"It's no surprise that repayment outcomes of borrowers at those places are poor," he adds.
Among nonprofit schools, low repayment rates were mainly among parents of students attending historically black colleges and universities and Hispanic-serving institutions. These schools have a strong reputation, especially compared with for-profits, says Looney, and are mainly attended by underrepresented minority students.
"What's striking about this is we're asking parents to make a choice: If they want to send these kids to these schools, then they'll have to take out a loan they can't afford to repay," Looney says. "That's an unfortunate set of circumstances."
Repayment challenges can lead to default
Federal loan servicers report missed payments to credit bureaus after 90 days. This will damage your credit, but the consequences of default — the point at which the loan is turned over to collections — are even worse.
Parent PLUS loans, like other federal student loans, default after 270 days without a payment.
A default will remain on your credit report for seven years, making it difficult to borrow for things like a new car or a home improvement. You'll miss out on options to lower or suspend payments. The government can also garnish or withhold your wages, Social Security benefits and tax refunds.
Parents PLUS borrowers are becoming more vulnerable to default. The five-year rate of default for a group of parents who began repaying in 2000 was 7%, but the rate increased to 11% for the group of parents who started repayment in 2009, according to the Brookings report.
Get help with Parent PLUS loans
There are a few things you can do to ease repayment and avoid default.
• Make sure your child maximizes federal student aid. This includes grants, scholarships, work-study and federal student loans.
• Opt for PLUS loans over private. They tend to carry lower interest rates and offer loan forgiveness and an income-driven repayment option.
• Borrow what you can afford. A good rule of thumb is to keep payments no higher than 10% of your after-tax monthly income. Use a parent PLUS loans calculator to estimate monthly payments.
• Don't request in-school deferment. You can also save interest by beginning repayment immediately instead of asking to pause your payments through deferment while your child attends school.
• Enroll in an income-contingent repayment plan. If your payments are unaffordable, this plan will cap your payments at 20% of your monthly discretionary income and increase your term to 25 years. You'll need to consolidate PLUS loans to qualify.