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Parent Plus Loan as a non-custodial parent

kevin303kevin303 11 replies3 threads New Member
Divorced and remarried. My daughter from my first marriage is starting college. My wife and I have contributed some to a 529 plan. I'm listed as the owner of the 529 plan and since I'm the non-custodial parent the 529 did not have to be reported on FAFSA. Since the balance is not enough to cover 1 year, we're simply saving that money for her senior year since a distribution would have to be reported on her FAFSA.

Trying to determine a way to assist her with the first 3 years of college that would not impact her financial aid. Don't have enough to just cut her a check, so considering a loan. Seems as a non-custodial parent, I can apply for a Parent Plus Loan. However, it's not clear to me if that would have to be reported next time she fills out FAFSA. Does appear that if I just cut her a check as a non-custodial parent, she would have to report that amount next time she fills out FAFSA as non-taxed income. Does that also apply if the money comes from a Parent Plus loan?
edited August 6
30 replies
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Replies to: Parent Plus Loan as a non-custodial parent

  • twoinanddonetwoinanddone 25278 replies20 threads Senior Member
    I'd think it would have to be reported, just like she'd have to report any money from you.

    It might be better for her to take the direct student loan and then you could just pay it for her. Takes trust on her part, but it is a lot cheaper in the long run. Origination fee for a student is 1% while it is 5 % for a parent. Interest rate this year for a student is 2.75% (they will issue the new rate next July 1 but likely to still be low) and the parent plus loan rate is 5.3%. Depending on her EFC, some of the direct loan may be subsidized too.

    Also, she won't report any money you gave her in 2020 until 2021, for the 2022-23 school year. Same with the 529, so you don't have to wait until her senior year. Just wait till Jan 2022.
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  • kevin303kevin303 11 replies3 threads New Member
    edited August 6
    She did qualify for some sub/unsub loans which she is taking, but still falls way short so she's looking into a private loan as well. Maybe if I'm the co-signer on a private loan, I could start paying directly to the loan without anything needing to be reported on FAFSA.
    edited August 6
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  • cptofthehousecptofthehouse 30649 replies59 threads Senior Member
    Is it possible for the custodial parent to take that loan and you write up a legal agreement that you would pay it? You can gift your spouse money and it would not be reportable.
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  • kevin303kevin303 11 replies3 threads New Member
    @cptofthehouse Good suggestion, but no way that would fly with my ex.
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  • cptofthehousecptofthehouse 30649 replies59 threads Senior Member
    What about your daughter signing for a loan from you in the amount of the PLUS parent loan. You then give her the money via the PLUS loan you take going directly towards college costs. Collateral is the 529 which you can use to pay off the PLUS loans in later years.
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  • blossomblossom 10550 replies9 threads Senior Member
    How big is her gap--- and have you calculated how much just writing her a check would impact her aid? If the school has gapped her (which it sounds like they have) extra money from you may not impact her aid as much as you think it will. Put simply- right now she can't afford this college. And without something from you- she STILL can't afford the college, right?

    It is great you are thinking about the parent plus loan. But if there are other kids in the mix, be wary of biting off more than you can chew.

    Are you still paying child support?
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  • twoinanddonetwoinanddone 25278 replies20 threads Senior Member
    What about your daughter signing for a loan from you in the amount of the PLUS parent loan. You then give her the money via the PLUS loan you take going directly towards college costs. Collateral is the 529 which you can use to pay off the PLUS loans in later years.

    I think the parent plus loan is paid to the school directly, so there really isn't an amount to lend and have repaid. There might be a refund amount (like the money to be used for room and board if living off campus), but the school will keep any amount it needs to pay the bill.

    Right now some of the private lenders have really low rates and are lower than the Plus rates. If you have good credit and can co-sign, that might be a good way to go. However, private loans don't have the same protections that federal loans do. Right now payments are suspended on federal direct loans (Plus loans too? I don't know) and interest is suspended too through September (and Trump says he's going to sign an order to extend that). Federal loans also have a variety of repayment options and forgiveness programs that private loans may not have.

    I think there is a way to compare the loans and the pros and cons of each type of loan. Check the Consumer Finance Protection Bureau (CFPB) as I think it's on there.
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  • twoinanddonetwoinanddone 25278 replies20 threads Senior Member
    If you want to use the 529 money before her senior year, change her to the owner of the account. Student owned 529s are considered the asset of the parent and assessed at the lower parent rate of 5.6% on the FAFSA rather than at the student asset rate of 20%.

    It may not matter as @blossom said.
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  • austinmshauriaustinmshauri 10172 replies393 threads Senior Member
    She did qualify for some sub/unsub loans which she is taking, but still falls way short so she's looking into a private loan as well.

    Is her mother going to co-sign a private loan for her? How much will all of you have to borrow for this school? If you need parent loans on top of the federal student loan it sounds like it's not affordable. Did she have any less expensive options? Maybe she should reconsider some of those.
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  • kevin303kevin303 11 replies3 threads New Member
    Thanks for all the suggestions!

    @blossom No, I did not calculate the impact to her financial aid which I should do instead of assuming it would be a huge impact.

    @austinmshauri Not sure if her mother is willing to co-sign a loan, but I definitely don't intend to co-sign every year. She's borrowing about $6000 via fed sub/unsub and is short another $15000. She was strongly considering CC (partly because of COVID impact and partly because of cost) but decided against it.

    @twoinanddone I hadn't considered making her the owner of the 529. Will definitely consider that.
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  • cptofthehousecptofthehouse 30649 replies59 threads Senior Member
    I think if you convert ownership of 529 to your D, It falls under Untaxed income. I think the formula for student t income(taxes and untaxed) gives the kid $9k allowance before adding half the excess directly onto EFC.

    If OP lends Daughter $X in loans for college, then takes PLUS to get those funds he’s lending.her, I don’t see a problem. Loan has to have paperwork generated and signed, exactly as any loan needs to be executed with payback terms. And market interest rate. Payment of interest annually by daughter should be i. There and at today’s rates no hardship. I know someone who did this— kid wanted to go to a pricier college than there were funds, and so parent took out the PLUS with loan contract with kid because those private loans hamstringing kid and parent are more draconian in terms and show up on credit reports. Parent forgave the loans upon graduation, which he may not have done if kid didn’t finish college.

    In this case, some of 529 can be used to repay the loan—up to $10k, if evoked before last year, use won’t affect FAFSA
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  • blossomblossom 10550 replies9 threads Senior Member
    Ooof. 15K short and that's AFTER your D takes out her maximum in loans?

    Boy- I'd be having the "let's talk about deferring for a year" conversation right now.

    Unless you are about to inherit a significant amount of money, somebody (your D, you, her mom) is heading to a heap of financial distress with the current plan. Even if you pay her senior year gap out of the 529.....

    Has your D seen a loan calculator and what the payback looks like-- and not a few years of eating ramen- a whole lotta years?
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  • cptofthehousecptofthehouse 30649 replies59 threads Senior Member
    blossom wrote: »
    Ooof. 15K short and that's AFTER your D takes out her maximum in loans?

    Boy- I'd be having the "let's talk about deferring for a year" conversation right now.

    Unless you are about to inherit a significant amount of money, somebody (your D, you, her mom) is heading to a heap of financial distress with the current plan. Even if you pay her senior year gap out of the 529.....

    Has your D seen a loan calculator and what the payback looks like-- and not a few years of eating ramen- a whole lotta years?

    The OP has a 529 that he owns that he can use to pay some of that gap. The problem is that if he uses it this year to pay that gap, the amount has to be reported as untaxed income to the student since he is the noncustodial parent. Them’s the rules. That would hem reduce aid in a subsequent year.

    So, in order to optimize financial aid AND the 529, the 529 should be used to pay the gap right before senior year. Then OP can pay off up to $10k in loans out of 529, and so can the student when 529 then turned over without affecting any more FAFSAs.

    I know non custodial parents in similar situations. But without a 529 in place. If they pay the tuition or any expenses on behalf of the kid, that’s supposed to be reported as untaxed income on the FAFSA which causes a gap. If the divorced parents are not in synch, no one wants to trust the other parent with outright cash gifts which could solve the problem as gifts to student’s parents not reportable on FAFSA

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  • kevin303kevin303 11 replies3 threads New Member
    Some more details.... I am still paying over $500/month child support but that ends in a few months. The EFC is < $3000 and it's a public college but they still asked for my financial info which is a bit unusual. So daughter's financial aid is significantly less than her two older siblings who went to different public colleges. My wife and I make pretty good money, just don't have much in savings. This is my youngest of 3. Oldest is on her own now and middle is going into his senior year of college.
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  • austinmshauriaustinmshauri 10172 replies393 threads Senior Member
    edited August 7
    Not sure if her mother is willing to co-sign a loan, but I definitely don't intend to co-sign every year. She's borrowing about $6000 via fed sub/unsub and is short another $15000.
    In another thread you said her mom earns ~$60k/year. Who's planning to pay off this $80k in loans (+ interest)?

    If you borrow this year but neither you or your ex borrow for years 2-4 she'll have to transfer. Unfortunately, she'll no longer be eligible for freshman grants.

    She was strongly considering CC (partly because of COVID impact and partly because of cost) but decided against it.
    If you and your ex refuse to sign her up for > $80,000 in loans she'll have to consider more affordable options.
    edited August 7
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  • cptofthehousecptofthehouse 30649 replies59 threads Senior Member
    Not sure if her mother is willing to co-sign a loan, but I definitely don't intend to co-sign every year. She's borrowing about $6000 via fed sub/unsub and is short another $15000.
    In another thread you said her mom earns ~$60k/year. Who's planning to pay off this $80k in loans (+ interest)?

    If you borrow this year but neither you or your ex borrow for years 2-4 she'll have to transfer. Unfortunately, she'll no longer be eligible for freshman grants.

    She was strongly considering CC (partly because of COVID impact and partly because of cost) but decided against it.
    If you and your ex refuse to sign her up for > $80,000 in loans she'll have to consider more affordable options.

    The kid is taking the basic Direct loans which amounts to $31k over 4 years, plus interest. I’m assuming some of this is subsidized. That is usual these days.

    The OP will take out and be involved in repaying the additional $40-$50k snd has finds in a 529 to do so. The issue here is to maximize financial aid, so taking money directly out of 529 as noncustodial parent is not a good idea if alternatives can be found. OP can use 529 to repay $10k of loans he takes out, and student can do the same. But for the first years, any 529 disbursements could drastically reduce Financial aid.

    The parent is looking for a way to temporarily borrow the money. Not sticking it to the kid to take out $80k in loans that kid has to repay.

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  • blossomblossom 10550 replies9 threads Senior Member
    Is there 80K in the 529? If so- great.

    If not- I'm back to trying to figure out- on the back of an envelope- how shifting the gap away from the kid to the dad is a great plan. So he's about to save 6K per year in child support- gotcha. That still leaves 9K as a gap-- for three years (because the dad stated he can pay off senior year's gap out of the 529). 9K X 3- 27K in parent plus loans.

    Still seems to me like a lot of debt. CPT- I understand the timing/shifting piece. But unless there's something material that I'm missing, this college seems unaffordable unless the entire loan amount is sitting in the 529 right now.

    College costs go up, not down as the dad knows having seen this rodeo already!
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  • BelknapPointBelknapPoint 5024 replies20 threads Senior Member
    The kid is taking the basic Direct loans which amounts to $31k over 4 years, plus interest.

    $27,000 over four years, plus fees and interest.

    But for the first years, any 529 disbursements could drastically reduce Financial aid.

    For the first three semesters, based on a traditional academic calendar. OP can use funds from the 529 he owns starting January 1st of the student's sophomore year without impacting the FAFSA EFC (again, based on a traditional academic calendar and assuming that the student will graduate in four years).
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  • BuckeyeMWDSGBuckeyeMWDSG 1121 replies15 threads Senior Member
    edited August 7
    "Oldest is on her own now and middle is going into his senior year of college."

    So the FA was calculated based on two in college this year, but next year there will be only one? Often reducing the number in college reduces need based FA awarded and the gap in the next 3 years could be much larger.

    Or perhaps all of her aid was merit based? So FA won't be reduced?
    edited August 7
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  • BuckeyeMWDSGBuckeyeMWDSG 1121 replies15 threads Senior Member
    edited August 7
    "The EFC is < $3000" That means Pell eligible this year (so some need based aid).

    If everything stays the same except no sibling in college EFC would be $6,000, so not Pell eligible assuming...

    "The maximum expected family contribution (EFC) eligible for a Pell Grant for the 2020–21 Award Year is 5711 as compared to 5576 for the 2019–20 Award Year."

    https://ifap.ed.gov/electronic-announcements/030420OperImpleGuidFSA2021FedPGPayDisbSch

    This tool might help you make estimates https://studentaid.gov/understand-aid/estimate

    Here is the formula form https://ifap.ed.gov/sites/default/files/attachments/2019-10/2021EFCFormulaGuideOct2019UpdateAttach.pdf
    edited August 7
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