College students take on loans as an investment: Presumably, they’ll graduate and reap the benefits — income that helps them repay that debt and then some.
But parents borrow for their children without the promise of higher earnings. And legally, they’re the ones on the hook.
Federal parent PLUS loans are easy to get: Colleges often list them alongside grants and undergraduate loans on financial aid award letters. They lack traditional underwriting requirements for credit history and income. There's also no limit on how much a parent can borrow in total.
These factors make it easy for parents to borrow more than they can handle.
“I feel like parents feel more pressure to take on unaffordable debt when it comes to college than they would for anything else,” says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors.
Parent PLUS loans also offer fewer options to make payments manageable, and navigating them is more complicated.
“It's not insurmountable to access all of these things, but when you have all the things together it’s a lot of hoops that parents have to jump through in order to get relief,” says Rachel Fishman, deputy director for research with the Education Policy program at New America, a nonpartisan think tank.
Here's why parent PLUS loans can mount quickly, and how struggling parent borrowers can reduce payments and pursue forgiveness.
Why parent PLUS loans pose a repayment challenge
Parent PLUS loans were initially intended to help parents from middle- and upper-income backgrounds who didn’t have cash on hand, but had assets, says Kristin Blagg, a senior research associate in the Center on Education Data and Policy at the Urban Institute, a nonprofit research organization. But over time, the target borrower for these loans shifted toward middle- and lower-income families.
“The logic of ‘OK, you have assets you can lean on to repay this debt’ kind of falls apart for lower-income families,” Blagg says.
Parent PLUS loans are also the most expensive federal loan type: Currently they carry an interest rate of 6.28% for the 2021-22 school year, compared with 3.73% for undergraduate loans. And they carry higher origination fees — currently 4.228%. Parents who meet traditional income and credit standards can get private student loans at much lower rates with zero origination fee — but parents with low income or spotty credit histories cannot.
Over the last seven years, parent PLUS loan debt has grown from $62.2 billion to $103.6 billion — a 67% increase, compared with a 39% increase in loans for undergraduate students.
While there’s little information about default rates among parent borrowers, both Mayotte and Fishman say there’s enough anecdotal evidence that shows some borrowers are struggling to repay these loans.
Lawmakers, student debtors and activists have put sustained pressure on Washington for loan cancellation of as much as $50,000, but there is no specific proposal making its way through Congress and no guarantee that PLUS loans would be included.
Current possibilities for parent borrowers
Here are the options available to parents now:
Pursue income-contingent repayment forgiveness. Income-driven repayment is a safety net for all federal student loan borrowers, but parent PLUS holders can access only the most costly of the four plans: income-contingent repayment, or ICR. This caps payments at 20% of your discretionary income and lasts 25 years.
ICR is especially useful for older parents who, once they retire, can expect to have less income than they did when they took out the debt. After 25 years of payments, parent borrowers will have the remainder of their debt forgiven.
Qualify for Public Service Loan Forgiveness. Public Service Loan Forgiveness provides the opportunity for forgiveness after 120 payments while the parent is working for an eligible nonprofit or government employer.
However, this cancellation is difficult to achieve: Federal data analysis shows only 1.16% of all applications have been approved as of April 29, 2021. It is unclear how many of those applications or approvals are PLUS borrowers.
Parent PLUS borrowers must first consolidate their loans into a direct consolidation loan and enroll in income-contingent repayment in order to make qualifying payments.
Utilize closed school and borrower defense. When schools close suddenly or engage in deceptive practices, student loan borrowers, including parents, aren’t necessarily on the hook to repay their debt.
Under closed school discharge rules, if school closes while a student is still attending, all or some of the parent PLUS loans used to pay for the program would be discharged under closed school discharge, according to the Department of Education.
If a student loan borrower is misled by their school or the institution violated state laws, parent loans can be discharged through a forgiveness program called borrower defense to repayment. Under borrower defense guidelines, parent PLUS loans would also be discharged if a student’s claim is approved.
Qualify for disability discharge. Parent loan borrowers who become disabled could qualify for total and permanent disability discharge. Eligible borrowers must have a physical or mental impairment that prevents them from working.
The Social Security Administration or a physician must verify that the physical or mental impairment meets certain conditions.
Refinance privately in your child’s name. The only other way to get rid of your debt is to refinance in your child’s name with a private company. By doing this, your child would become legally responsible for repaying the debt you originally took out.
Only a few private lenders do this and, if you do it, the loan will no longer be eligible for income-contingent repayment or potential forgiveness available through the federal government. Your child will need to have strong credit, a history of making loan payments on time and income to afford payments.