What will happen if you don’t pay the parent plus loan, and is borrowing it a good idea after all?
Every child dreams of achieving their goals: enrol in a prestigious college, have a successful career, land dream clients. But often the first step of this goal is too expensive and not affordable for many households in the United States.
Statistics show that 56% of students can’t even afford going to college, and they have to ask for student loans and other means of funding.
There are different types of school loans that students can take and many programs that fund full payment of tuition fees for students. When they take these student loans, they have to repay the principal amount back with added interest in a set period of time.
Along with student loans that are only granted to students, there are parent PLUS loans for parents. Another means of financing the education of children, these loans are a common practice in the country, with a total of student loan debt of $1.56 trillion.
Parent Plus Loan Definition
Parent PLUS loans are given out to parents who wish to fund their children’s college tuition fees, these are federally funded loans issued directly to parents. The full amount is awarded to the student, but is sent directly to the school. And if there are any refunds, they will be given to the parent only (or the student if the parent gives permission).
There is an option given to parents who don’t wish to avail the full amount of the loan, since there could be other sources of financing like tax credit or some other private loans.
How does Parent Plus Loan work?
Parent PLUS loans have a fixed interest rate, and the borrower pays a basic fee at the start of the loan, called an origination fee. Parent PLUS loans are not subsidized, so interest begins to stem on the outstanding loan balance as soon as funds are disbursed and continues to rise even if the loan is in postponement.
The process starts by applying and filling out the FAFSA (Free Application for Federal Student Aid) and then downloading a promissory note from the school financial aid website. The note needs to be carefully read and you will find all details there. The approved loan could be the full cost or minus the amount from other sources of financial aid.
It all depends on how much you really want the funds to cover, you can ask for a full payment or partial if you have other solid means of paying for the child.
Parent Plus Loan Eligibility
There is not a tough eligibility criteria if you wish to get a parent plus loan. This has been eased down so that more people can actually benefit from it. The criteria is simple, the parent plus loan is awarded to:
- Biological or adoptive parents of an undergraduate dependent child
- Grandparents of the child ONLY IF they have legally adopted the dependent child
- People with a smooth credit history
- If you meet the general criteria of the Federal Student Aid
Parent Plus Loan Interest Rate
The current interest rate for a parent plus loan is at 5.30% which is to remain fixed throughout the life of the loan. This is applicable to all loans granted from July 1, 2020 and before July 1, 2021.
The amount you can borrow is the cost of attendance of the course of the degree minus any other means of financial assistance you may have.
Parent Plus Loan Calculator
Looking for a parent plus loan can be a challenging process, especially if you have no clue about how federally funded loans work. To ease this problem, many websites have added an online parent plus loan calculator which helps them estimate the monthly payments they will be required to make.
The calculator asks for information like loan amount, current interest rate, origination fee, number of years (term of the loan) etc. to be able to give a close-to-accurate estimate of the amount.
What happens if you don’t pay Parent Plus Loan?
Financial constraints can fall upon anyone at any given time. And with a hefty loan to pay back, there is added pressure too. What if you’re in a major financial fix and are unable to pay back the parent plus loan?
Well, here is what’s going to happen:
- After 90 days of missed loan payments, your loan will be reported as delinquent to the credit bureaus
- After 180 days of missed loan payments, your credit report will be updated to show the lengthy nonpayment history
- After 270 days of missed loan payments, your loan will default.
As harsh as the process sounds, if you think your financial constraint is temporary and you will be up and about in 2-3 months, you can apply for loan forbearance which will give you a break from paying the money for a couple of months.
The real issue starts when the loan payment hits default!
This means along with the loan that will increase drastically, you will have to face administrative wage garnishment, social security benefit payment offset and a tax refund offset. All of these will unknowingly invite so many consequences for you.
If your loan hits default, there is still a chance for you to bring it back by entering into loan rehabilitation. This is a process where you agree to pay 9-monthly payments in a repayment program. After you’re done paying for the 9th month, you will be pulled out of default and transferred to a new loan servicer. You can then customize another payment plan that suits you, and then make sure you stick with it too.
Are Parent Plus Loans a good idea?
Well, if we’re being completely honest, a parent plus loan has its own share of risks and benefits. And it all kind of also depends on how badly a family needs financing for their child. A lot of times when the children have graduated and years have passed, parents’ careers are also ending and they’re reaching the retirement stage. In such cases it gets really hard for some parents to keep paying the loans they took.
One way of avoiding this situation is transferring that loan on to their children if they’re no longer dependent. If the children have graduated and have landed stable jobs or businesses, it is a good idea to have them pay for the loan.
One major disadvantage of the parent plus loan is the high rate of interest. In 2020, it is 5.30% as mentioned above, and even though it is fixed, the amount is accumulated and becomes a very big sum, often very hard to pay back.
Moreover, as soon as the loan is granted, the repayment process starts without any leverage of a grace period. With other student loans, there is an option for the student to start paying back after 6 months or 1 year into the degree.
It is naturally a better idea to apply for a student loan instead because they might be eligible for student loan forgiveness plans and the child may get out of paying the loan- legally. A parent plus plan is an added burden on parents and while it is important to get your child through college, it is also important to think of the long-term risks associated with paying back certain loans.