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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.

Liz Weston

Liz Weston

"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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Parent PLUS loans have fewer repayment options if you get into trouble. The loans, for example, aren't eligible for the income-based repayment program that can dramatically reduce required payments from lower-income borrowers. Parent PLUS loans may be eligible for the less generous income-contingent program, but only if the loans were combined into a Direct Consolidation Loan on or after July 1, 2006.

Furthermore, student loans typically can't be erased in bankruptcy court, outside of extreme circumstances such as the total permanent disability of the borrower.

Far from warning parents about these hazards, many colleges actively promote parent PLUS loans. Some even include them in the financial aid offers they send out, potentially giving families the erroneous impression that the college's education is far cheaper than it actually is.

"There are plenty of schools that count on families to be so confused (by financial aid offers) that they agree to go to a school if it seems reasonably priced, even when it isn't," said Lynn O'Shaughnessy, the author of "The College Solution: A Guide for Everyone Looking for the Right School at the Right Price."

O'Shaughnessy said she's seen many deceptive financial aid offers, including some that don't even include the word "loan." The offers just refer to "PLUS" or "Stafford," as if they were some kind of grant rather than money that has to be paid back.

Whether they understand the risks or not, parents increasingly have turned to PLUS loans to fill the gap between financial help offered by the schools and their actual cost. Nearly 1 million families borrowed $10.6 billion in parent PLUS loans last year, the investigation by ProPublica and The Chronicle of Higher Education found. The number and the inflation-adjusted amount of such loans have more than doubled since 2000. Parent PLUS loans may be contributing to rising levels of student debt among older households. The percentage of households headed by people 55 to 64 with education debt more than doubled between 1989 and 2010, according to the Federal Reserve's Survey of Consumer Finances. The amounts owed more than tripled, from a median of $4,200 (in 2010 dollars) to $15,100. (A median is the halfway point, so half the families owed more and half less.) For the first time, significant numbers of retirement-age households reported having student loan debt in 2010. A little more than 4% of households headed by people aged 65 to 74 had education loans, with a median amount owed of $12,000.

Growth in student loan debt, by age of borrowers, in 2010 dollars



1989

Percent with loans

Median amount

2010

Percent with loans

Median amount

Change

Percent with loans

Median amount

All families

8.9%

$5,000

19.2%

$13,000

115.7%

160.0%

Age <35

17.1%

$5,100

40.1%

$13,000

134.5%

154.9%

35-44

10.9%

$3,400

26.5%

$13,500

143.1%

297.1%

45-54

7.3%

$5,700

17.6%

$12,000

141.1%

110.5%

55-64

4.1%

$4,200

9.3%

$15,100

126.8%

259.5%

65-74

*  

*  

4.2%

$12,000

   

75 or older

*  

*  

*  

*  

   

Source: Federal Reserve Survey of Consumer Finances

Taking on a moderate amount of debt for an education can be a good deal. The lifetime earnings of someone with a bachelor's degree is expected to be 66% higher than someone with just a high school diploma, according to the College Board. Unemployment rates for college graduates are half that of high school graduates.

But the key phrase is "moderate amount." Clearly, it's far too easy to get in over your head with student loan debt.

If you have children headed for college, here's what you need to do:

Minimize the need to borrow. This sounds simplistic, but too many parents are naive about the financial aid process and assume they'll get roughly the same deal, regardless of the school, O'Shaughnessy said. Nothing could be further from the truth. Some universities are notorious for their lousy financial aid packages and their eagerness to push loans. Better-known universities in big cities on the coasts seem to be particularly bad at meeting student financial needs, O'Shaughnessy said, probably because they know they'll attract plenty of students who want the big-name, big-city experience.

"Schools in the Midwest, the South, up the coast (from big cities) tend to give you better deals," she said. "It's the ones people don't know about that have to give better aid" to attract students, "and you can still get a great education." Finding a school that really wants your child also can help; if her test scores are in the top 25% of the institution's student body, she's considered a more desirable candidate. You can find test score distributions, and what percentage of financial need schools meet, at the college Board site.

Let your kid borrow. It's her education, after all. As an undergraduate, she can't get in too much trouble with federal student loans, since the total amount she can borrow is limited to $33,000. The top interest rate on Stafford loans is 6.8%, and these loans qualify for the more generous income-based repayment plan if she runs into financial trouble.

Explore alternatives. I'm not a fan of private student loans, since they come with variable interest rates and far fewer consumer protections than the federal variety have. But O'Shaughnessy said parents with excellent credit scores and the ability to pay the loans off quickly should explore whether they can get a better deal from a private lender. Some have rates of under 5% for well-qualified borrowers. One site to check is CU Student Loans, which represents member-owned credit unions that offer private student loans.

Another possibility is tapping home equity, if you have any, with a home equity loan or line of credit. Home equity loans have fixed rates, which are typically higher than regular mortgage rates, while lines of credit have lower but variable rates. You're putting your home at risk, so make sure you can make the payments and pay off the loans fast (preferably in 10 years or less).

Cap your borrowing. Since lenders will give you more money than you can comfortably repay, you need to set your own limits. Ideally, your payments would:

Equal no more than 10% of your income and

Pay off the loan in 10 years or less.

In any case, you shouldn't borrow more than you can pay off before you hit retirement age -- while still being able to save for retirement. If you can't afford to do that, then you probably can't afford the education you're trying to buy.

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Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.