11/15/2012 7:15 PM ET|
Parent PLUS loans pose hazards
Parents can use these federal loans to pay for a child's college costs, but they come with serious risks. Borrowers, beware.
If you want your kids to attend college, be aware of a hazardous type of loan that could prevent your retirement and leave you strapped to a lifetime of debt.
We're talking about parent PLUS loans. These fixed-rate loans are offered through the federal government to parents of dependent undergraduates. But if you can't pay back what you owe, your tax refunds could be seized and your wages garnisheed. You could even lose a chunk of your Social Security checks, however meager they might be.
That's scary, but what's even scarier is that the same loans that pose these hazards also could be your best bet if you want your children to get college degrees.
Unlike federal student loans for undergraduates, there is no preset limit on parent PLUS loans. You can borrow up to the full cost of your child's education. (If your kid gets financial aid, the maximum is the full cost minus that aid.) You don't need pristine credit or any proof that you can pay the money back.
Which is part of the problem.
Pauline emailed me, hoping there was some kind of escape clause she'd missed after she and her husband borrowed more than $200,000 in parent PLUS loans for their two daughters' college educations. The two girls both had medical conditions that Pauline said prevented her from working and that cost them most of their savings.
"We were at a high income level when the loans were made," Pauline wrote, explaining that her husband's income was over $300,000 at the time. "After 25 years with his company, he lost his job as a vice president. I went back to work, but only make $35,000. His new position is $100,000."
Their income is still high by national standards, but not high enough to make much progress on their enormous debt. The daughters can't help -- both graduated from college, but one has a "not great" job and the other is unemployed.
"We are taking out of our savings, (about) $3,000 monthly to pay our bills in hopes of things getting better," Pauline wrote. "My husband handles the finances (and) says if we can get lower payments, it won't matter on the student loans, we still have to pay forever. . . . He isn't or can't think about retirement."
You don't need a high income to get over your head with parent PLUS loans. One in five parent PLUS borrowers took out a loan for a student who received a Pell Grant, according to an analysis by financial aid expert Mark Kantrowitz, the publisher of FinAid.org and FastWeb. Pell Grants are reserved for the neediest students, typically those from families who earn $50,000 or less.
Kantrowitz's analysis of 2007-08 Department of Education data, the latest available, also found that monthly payments for PLUS loans ate up an average 38% of borrowers' income among those in the bottom 10% of incomes.
"Either these parents don't know what they are getting into," Kantrowitz said, "or they expect their children to make the payments on the loans."
Kantrowitz's findings were included in a joint investigation by ProPublica and The Chronicle of Higher Education of parent PLUS loans that found many families have overburdened themselves with this debt. The investigation highlighted one single mom whose modest $25,000 income wasn't a barrier to getting $17,000 in loans for her daughter's education -- a debt that 12 years later has more than doubled, thanks to accumulated interest and fees.
The nominal interest rate of 7.9%, while relatively low for a loan that's not secured by property, is high enough that the amount owed can double within a decade if no payments are made. (There's also a 4% "loan origination fee" that's deducted from each loan disbursement.)
The federal government doesn't check incomes or employment status before approving these loans. The government also doesn't inquire about your other debts or your debt-to-income ratio. PLUS borrowers can't have an "adverse credit history," which means being currently 90 days or more late on a bill or having a bankruptcy, foreclosure or repossession within the previous five years.
"In effect, the PLUS loan credit underwriting is looking for signs that the prospective borrower is struggling to repay current debts," Kantrowitz said. "It does not evaluate whether the borrower can afford to make the payments on the new PLUS loan debt."
The government has powers that other debt collectors envy, such as the ability to:
- Seize tax refunds.
- Garnishee wages without a court order.
- Grab a portion of Social Security benefits, which are usually off-limits to collection agencies.
- Pursue the debt indefinitely, since there is no statute of limitations on student loan collection, as there is with most other debt.
You also could lose the professional or vocational license that allows you to work, since several states allow licensing boards to deny, suspend or revoke such credentials for people who default on student loans.
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Holy cow Liz! I can't believe what I read in your stories all too often. You write a sob story about some couple making$ 300K a year with student loan issues! It's bad enough that with such a high income they never bothered to save a dime for their 2 kid's education. Then, even with their $300k income, they couldn't buckle down and pay anything with cash flow??? So they took out $200k in loans!! This couple has to be insanely financially illiterate. They have to be living way too high off the hog. Makes me wonder how little they have saved for retirement. I don't feel one teeny tiny bit sorry for these people. They have no one but themselves to blame. Looking for a loophole.....give me a break.
It would seem that you just can't fix stupid.
A few things from this article stand out to me.
1."her husband's income was over $300,000 at the time. "After 25 years with his company, he lost his job as a vice president"
Ok, he was with the company for 25 years. He wasn't working for $10/hr for 24 years then suddenly became vice president with a big salary overnight.
He worked his way up the ladder at this company, he was probably making six figures for a loooong time, and made several millions of dollars during his time at that company.
Based on the information that was provided, this couple should have a net worth of at least 1 million dollars(only 3 years of peak income) and probably alot more than that.
Sorry, i can't feel sorry for them.
2."I went back to work, but only make $35,000. His new position is $100,000."
$135,000 combined income. They are still making damn good money. If they can't survive on that kind of income they need to adjust their lifestyle.
Move into a cheaper home, sell the summer home, stop buying expensive new cars, clothes, jewelry, stop going on vacations.
Sorry, i can't feel sorry for them.
3."The two girls both had medical conditions that Pauline said prevented her from working and that cost them most of their savings."
He was vice president of the company, i am sure he had damn good health insurance that covered most medical bills.
She couldn't work? The girls required care 24/7? How did the girls go away to school? Did mom live in the dorm with them?
It sounds like BS.
Sorry, but college isn't for everyone. If these girls were so medically challenged then the parents should have been putting money into a trust fund for the girls future needs, and not into a college education.
Sorry, i can't feel sorry for them.
4."We are taking out of our savings, (about) $3,000 monthly to pay our bills in hopes of things getting better"
That tells me you lied in quote #3.She said they could hardly save anything(of a $300k salary) because of tremendous medical bills, but suddenly they find a magic savings account that spits out $3,000 a month.
They currently have income of $135,000 + another $35,000 that they take from savings, thats $170,000 a year.
It sounds like they don't know how to manage money. Is it any wonder he lost his job as vice president?????? He can't manage his own finances, how could he manage a company's finances?????
He was making $300,000 a year an couldn't pay cash for for college educations???
This story is either complete BS, or it is a story about a family of complete idiots.
If it is fake then shame on the author.
If it is real, then i can't feel sorry for a family that pisses away that kind of income, and can't pay their bills.
And stop crying about 7.9% loan interest rates.
In the late 70s, early 80s people would camp out in front of the bank for weeks to get a 30 year mortgage at roughly 15%.
I agree with mbigston722. Sounds like they were living the high life, spent as much as they made and saved nothing. Went to fancy liberal arts schools, got worthless degrees and are sitting back home with mom & dad, We want to blame the kids, but clearly the parents are not being parents in this scenerio. We're finishing up with our 2nd in college, don't even make as much as they do now and still manage to pay it ourself, no loans or grants - roughly $130,000 for 2 kids in state colleges.
This is like the mortgage meltdown. These people want to blame someone else for their problems.
He was making 300k and couldn't put money back for their college? Now they get by on 135k and payout 3k a month for the student loans. Sounds to me like he wouldn't be able to retire even if he was still making 300k a year. Being bad with money is being bad with money no matter how much you make. And I'm sure as Vice President of the company and being paid that kind of money his insurance was also excellent. She had to stay home with the kids because of their medical condition. So I also assume she must have gone off to college with them to take care of them there as well.
With what they are getting by on now at the same rate could have put back 170k a year (minus taxes). In four years time they could have put both kids through college and paid off a very nice house. So now they want a loophole to get out of paying off the loan.
They still make a very good living and people making substantially less manage to put their kids through college and live up to their word and pay their loans.
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