Reader Beware: Clearing up College student College Loans for Parents
In our developing “ Reader Beware ” series, College Coach finance experts seek to correct inaccurate college finance information discussed in the popular press. The goal is to help families make well-informed college finance decisions rather than relying on assumptions, half-truths, and misinformation picked up from inexpert sources. In this second installment of the series, we take a look at a recent article in the St . Louis Post-Dispatch entitled College Loans May Trap Unwary Parents .
All of us at College Coach don’t want any family to feel “trapped” by college loans. We work together with parents to help their children access a top-notch education at a price they can afford. If a family chooses to produce borrowing a reasonable part of their college payment plan, we make sure they maximize the most favorable student loans prior to the parents even consider borrowing by themselves. We agree with this article’s writer that parents need to enter into college loan agreements with eyes open and carefully consider the amount of schooling debt that they can afford to take on. But we must point out some factual errors in the author’s argument that the government’s parent loans are inherently a lot more hazardous than their counterparts in the students’ names. These errors create student loan repayment appear, frankly, just a little easier than it actually is, while providing the impression that parent loan repayment is more problematic than it actually is.
Is Pay As You Generate as good as it sounds?
The article states that “federal [student] loan rules limit mortgage payments to no more than 10 percent of the income. ” An oversimplification of the student loan repayment process, this statement is referring specifically to the Department of Education’s Spend As You Earn (PAYE) student loan repayment plan , one of many repayment strategy options available to some (but not all) student loan borrowers. Only “ new federal loan borrowers” experiencing a “ partial financial hardship” in paying back their federal Immediate Loans can take advantage of PAYE repayment, and even then it is not automatic. College student borrowers must actively request that their loans be put on the PAYE repayment plan. Without borrower action, student loans are put by default on a fixed ten-year repayment schedule, along with monthly payments often far exceeding 10 percent of borrower income.
Parents have access to adjustable loan repayment terms too
The article goes on: “At least the students’ repayment terms are flexible when they don’t have much income. Parents obtain no such consideration… There’s no deferral or forgiveness [of parent PLUS Loans], even if a parent loses work or becomes ill. ” These types of statements are simply untrue, and make mother or father loan repayment appear more onerous than it truly is. Though Income-Based and PAYE repayment plans are only agreed to students, parents borrowers in need of repayment flexibility can often choose among Standard, Graduated, and Extended repayment plans, as well as (depending on their lender) Income-Sensitive or (in limited circumstances) Income-Contingent repayment plans. Parent PLUS Financial loans can be deferred for many reasons, including the student’s or the parent’s enrollment at school, or during periods of joblessness or other economic hardship. PLUS Loans can also be cancelled in the event of the death or permanent disability of the student or parent borrower.
We agree that learners should maximize their federal mortgage eligibility before parents consider asking for, and that parents need to think very carefully about the debt burden they are ready and able to bear to pay for their children’s education. But we also believe that parents should make these borrowing decisions based upon complete and accurate loan information.
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