Published in: Student Loans | Nov. 3, 2019

When Taking Out a Parent PLUS Loan Is a Really Bad Idea

By:  Dana George

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If you see any of these red flags, think twice before applying for a Parent PLUS Loan. 

It's a safe bet that you love your kids. And when those kids want to earn a college degree, you'll likely look for ways to make it easy on them.

You may even want to take out a Parent PLUS Loan to help them cover the costs. And although this can help, some circumstances make taking out a loan a really awful idea. 

A mother with her arm around her teenage daughter sitting on a bed.

Image source: Getty Images

The appeal of Parent PLUS Loans

In an attempt to bear the financial burden of their children's higher education, parents often take out a Parent PLUS Loan. A Parent PLUS Loan is a federal student loan offered by the U.S. Department of Education and granted to parents of dependent undergraduates.

The appeal is the ability to borrow enough to cover the difference between the estimated cost of your child’s education and any financial aid they receive.

Whether your child offers to help pay off the loan after graduation or you plan on covering it yourself, a Parent PLUS Loan legally belongs to you. The payment is your monthly responsibility, is on your credit report, and can impact your finances for years to come.

The delicate balance at this point is determining how to help your child without harming yourself. 

You might want to reconsider a Parent PLUS Loan if any of the following apply:

You have poor credit

You won't qualify for a loan if you've had one or more debts with a combined balance greater than $2,085 that were

  • placed in collections,
  • charged off within the previous two years, or
  • paid 90 or more days late.

In addition, there can be no foreclosures, repossessions, tax liens, or wage garnishments on your credit report for the past five years.

You need an endorser to qualify

An endorser is like a cosigner -- this person will be responsible for repaying the loan if you don't. If you need someone to cosign on a student loan, you should seriously consider the wisdom of taking on new debt. 

Your child seems unsure

If your son or daughter seems hesitant about going to college or has a history of dropping out of activities when things get tough, think twice about whether you want to take out a loan.

Remember: That loan has to be repaid whether or not your child stays in school.

You're struggling to pay bills

If you're already robbing Peter to pay Paul, now isn't a good time to take on another loan. Unlike a regular federal student loan, the Parent PLUS Loan isn't eligible for income-based repayment plans. This means your monthly payment will stay the same for the life of your loan and late payments won't be forgiven if you run into financial trouble.

In addition, the Parent PLUS Loan requires you to pay an origination fee. For loans disbursed between Oct. 1, 2019 and Oct. 1, 2020, that fee is 4.236%. It's automatically deducted from the amount borrowed.

You're not ready to make payments right away

Unlike your child, who can typically postpone loan repayment for six months after graduation, you must begin to make payments on a Parent PLUS Loan right after the loan has been paid out.

Although it's possible to apply for a deferment while your child is in school, interest will continue to accrue while payments are paused.

You're nowhere near ready for retirement

Your child has decades to work after they graduate, which is time enough to pay off their student loans if they handle the debt correctly.

You, on the other hand, have less time to prepare for retirement. If taking out a Parent PLUS Loan will divert money that should be going into your retirement account, think twice about shorting your future.

Remember: You're not alone

A new study by Discover Student Loans found that a growing number of parents expect their children to help pay for more of their higher education. Only 28% plan to cover the entire cost.

The survey also found that 65% of parents are concerned about having enough money to help. Given the fact that the average cost of tuition increased nearly 260% between 1980 and 2014, it makes sense that parents wonder what they can do

Why not come up with other ways you can help? Let your kids live at home while attending college, keep them on your cellphone plan, cover their car insurance while they’re in school, and make it your mission to help them find and apply for every scholarship and grant they’re eligible for.

Fortunately, parental support comes in many forms.

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