According to the US Department of Education, in 2016 borrowers were holding $74.5 billion — yes, billion — in PLUS loans to pay for their children’s college education. The College Board says that the annual parent PLUS loan volume increased nearly five times over the past decade.
Parents qualify for PLUS loans up to the full amount needed for the cost of college so long as they do not have poor credit, but that does not mean that parents can really afford to borrow that much. And the burden of parent PLUS loans can carry over to retirement.
So there are some things that you need to understand Mom and Dad before you take out a PLUS loan.
First, PLUS loans typically have higher fees and interest rates than the other student loans your child takes out to pay for college.
Second, you cannot transfer these loans back to your child when they graduate.
Third, PLUS loans only qualify for one kind of income based repayment plan, called income contingent repayment (“ICR”). ICR is less generous than other repayment options offered by the federal government and it only gives loan forgiveness if a borrower is in the repayment plan for 25 years.
Fourth, some parents swap out their PLUS loans by obtaining home equity loans or lines of credit which can provide lower interest rates than PLUS loans, depending on your credit score and debt load. But the downside is that you have now put your house at risk if you default.
Finally, student loan refinancing options are only available if you have really good credit (typically a FICO score of 720 or more). If you feel you can qualify you should definitely look into this option because the interest rates are usually lower than the PLUS loans. Additionally, some online lenders (CommonBond, DRB, SoFi) will permit you to transfer the refinanced loans to your children if they have the ability to pay them (which hopefully they have from that high paying job they got after you spent an arm and a leg sending them to college in the first place).