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Read this before you take out a Parent PLUS loan

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Replies to: Read this before you take out a Parent PLUS loan

  • overbearingmomoverbearingmom Registered User Posts: 117 Junior Member
    edited May 24
    Sorry if this isn't an appropriate place to ask this, but if we can almost float the direct pay portion of son's tuition, but we have a daughter coming through 2 years later, is it ultimately better for financial aid prospects for her applications to take out a loan and pay that back as we can? I mean, paying direct will have us watching Netflix instead of going out and no vacations save traveling to see him, so a loan would give us temporary breathing room but add to the ultimate cost of it.
  • lastone03lastone03 Registered User Posts: 796 Member
    @overbearingmom The FAFSA doesn't consider the debts you have. It looks at assets and income to determine your EFC. If you were to take out a small loan for breathing room (which is perfectly acceptable), the best would be the Direct Student loan in your son's name. Our kids did it to have skin in the game (in and out in 4 years) and to give us a little breathing room when the 2 older ones were in at the same time. The Direct Student loans come with lower interest rates and grace periods, and some are also subsidized based on the EFC. Those were important considerations for us as we knew we would be paying off their loans. An additional perk for our kids was the creation of a solid credit history which goes a long way when looking to buy a car, sign a lease, or get a job.

    https://creditcards.usnews.com/articles/when-do-employers-check-your-credit
  • overbearingmomoverbearingmom Registered User Posts: 117 Junior Member
    @lastone03 don't you have to be granted the ability to have a student loan? He was offered student loans by one or two, but not at the school he will be attending.
  • lastone03lastone03 Registered User Posts: 796 Member
    edited May 25
    @overbearingmom I guess your son will be attending a school that has a no loans policy?

    https://www.usnews.com/education/best-colleges/paying-for-college/articles/2017-10-23/schools-that-offer-no-loan-aid-packages-to-students

    If that is the case, then the only other options I can think of are private loans or equity loans (if you have home equity). I am not a fan of attaching my home to a student loan as collateral, but many others don't seem to mind doing so.
  • coolguy40coolguy40 Registered User Posts: 1,821 Senior Member
    Parent Plus loans are the worst loans you could commit yourself to. If you don't make car payments, you lose your car. If you don't make mortgage payments, they seize your house. Fail to make high interest student loan payments, the bank can simply take you to court and force you to pay by seizing your house, car, and other possessions as they see fit. In effect, the bank has been given the same power as the IRS.

    Instead of complaining how corrupt and unfair the system is. Do yourself a favor and make sure the college you go to is affordable.
  • overbearingmomoverbearingmom Registered User Posts: 117 Junior Member
    @lastone03 Whatever loan we have at this point would be a cash flow thing and not something we would get ourselves into a mountain of debt (retirement be damned beyond the maximum IRA we take out). We lived on one income when my kids were little and we can be frugal again, and we do have a home equity line and live in CA so we are cash poor but can tap into the equity. Because my son has special needs, we aren't 100% sure how easy it would be for him to get a job and pay off loans, but he is going to the right school that gives him the best chance to do it. And that will give me comfort when friends are off on "empty nester vacations" and we are home by the fire.
  • calmomcalmom Registered User Posts: 20,044 Senior Member
    @overbearingmom --- whether your son was offered loans as part of his package or not, he is eligible to take federal direct loans up to specified amounts. If your son has a financial aid package that meets his full need as determined by FAFSA, then the loans would be unsubsidized. If there is a gap between FAFSA EFC and the college's determination of need, then he would be eligible for subsidized loans as needed to fill in the gap (up to the maximum allowed). If FAFSA EFC is fully met then your son would still be eligible for federal direct loans, but they wouldn't be subsidized.

    And the advantage of PLUS loans over other forms of borrowing is that there are some protections built in --- including that the debt is forgiven if the student dies, and can also be forgiven if the parent borrower becomes permanently disabled; additionally there are a variety of different options for reducing the monthly payment amount if the parents run into financial payments down the line. That may not be a factor for you as you are planning only short-term borrowing as a way to ease the financial strain of paying for college -- but that is why many parents would be hesitant to use HELOC financing. Apparently, @coolguy40 thinks it is better to be both jobless and homeless at the same time, rather than to have to go the trouble of doing the paperwork to consolidate a parent PLUS loan and signing up for an income-contingent repayment plan if something happens to the primary wage earner in the family... but some of us would rather pay a little more in interest because of the flexibility down the line .... especially as we parents are getting older and the prospect of disability or loss of work becomes more important to plan for.
  • lastone03lastone03 Registered User Posts: 796 Member
    @calmom I think @overbearingmom said previously that they weren't offered federal loans as part of their aid packet. That is why I asked if her son was going to a "no loan" policy school.
  • lastone03lastone03 Registered User Posts: 796 Member
    @overbearingmom I understand the need for a little breathing room, and I understand you won't be taking out much money. If you have ample equity in your home, then a small HELOC might be worth it if you are sure there is no way to get a loan from the Federal Government through the college, and you are 100% certain you can easily repay it without jeopardizing your home.
  • lastone03lastone03 Registered User Posts: 796 Member
    Parent Plus loans are the worst loans you could commit yourself to. If you don't make car payments, you lose your car. If you don't make mortgage payments, they seize your house. Fail to make high interest student loan payments, the bank can simply take you to court and force you to pay by seizing your house, car, and other possessions as they see fit. In effect, the bank has been given the same power as the IRS.

    Instead of complaining how corrupt and unfair the system is. Do yourself a favor and make sure the college you go to is affordable.

    As a former lender, there is a lot wrong in your commentary. I'll just leave it at that.
  • suzy100suzy100 Registered User Posts: 5,410 Senior Member
    @lastone03, kids going to schools with a "no loan" aid policy are still able to get federal loans. It just means that they won't show up in the aid package from the school. So, for example, if two schools determine that a student's need is $20K, the no loan school's package may show $20K in grants, and the other school's package may show $15K in grants and $5K in loans. Or the no loan school may determine the student's need is $15K (instead of $20K), it will show $15K in grants but the student can still get a federal loan for $5K. Hope that makes sense.
  • twoinanddonetwoinanddone Registered User Posts: 19,584 Senior Member
    @coolguy40 said
    Fail to make high interest student loan payments, the bank can simply take you to court and force you to pay by seizing your house, car, and other possessions as they see fit. In effect, the bank has been given the same power as the IRS.

    Well, that just isn't true. Even the IRS has to follow the procedure to get a lien on your house or other assets, and then execute on that loan. The IRS is a preferred lien holder, and gets some advantages over general creditors, but it doesn't jump over the secured lien holders (mortgage lender, car lien holder). ANY creditor 'can simply take you to court' if you don't pay, and then they get a judgment, then a lien, then execute on the lien. Taking your house is a lot of steps away, if it is even allowed under state law (not federal). Some states do not allow judgment liens to foreclose on a residence - they just sit in line like other unsecured creditors.

    @overbearingmom, I personally think it is worth tightening the belt now rather than taking a Plus or private loan. If you find it too uncomfortable, you can always take the loans out later, in March or sophomore year. Maybe you'll get a big bonus or your student will get a good job. The best order of loans is student Direct subsidized, then unsubsidized, and then a parent Plus or co-signed loan. Some parents might be able to get a better private loan than the rates/origination fee on the Plus loan, but the Plus loan does have some advantages of repayment plans, forgiveness on death of student or parent (the forgiven amount is taxable).

    If the direct loans aren't part of the FA package (and you filed the FAFSA), contact the FA office and they will add them to the FA package. They will probably be unsubsidized if they aren't originally part of the package.
  • lastone03lastone03 Registered User Posts: 796 Member
    edited May 25
    @suzy100 thanks for the clarification. I have always gone through the school to get the Federal Loans. After completing the FAFSA, how do you go about accessing the loan proceeds if the loan is not offered through the school? Just curious.

    Oops...looks like @twoinanddone answered the question.
  • ARTCCARTCC Registered User Posts: 173 Junior Member
    The Parent PLUS loan interest rate will be 7.6 percent for the 2018-2019 academic year.

    https://www.cnbc.com/2018/05/23/student-loan-interest-rates-take-a-leap-what-borrowers-should-do.html
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