Adam Minsky, a Boston-based lawyer, has been coaching student borrowers on how to deal with poor loan servicing, unscrupulous debt collectors and unsavory lenders since he started his legal practice in 2011. But in recent years, parents who’ve taken out loans to finance their kids’ educations have made up a slowly increasing share of his clients. Now about 20 to 30 percent of his practice, he says, parents often face an even tougher battle than their children do.
“When a young person comes to me, there’s the possibility where you’re at the beginning of your career. Things are going to get better. You’re going to earn more,” Minsky says. “The sad thing for some parents is that they’re very much aware that they’ve already peaked and they’re winding down.”
Inspired by his own frustrations with navigating the repayment of his student loans, Minsky decided to focus his practice on student debt. And he’s found a surprisingly robust market for his services. Since borrowers can be susceptible to misinformation and servicing struggles, seeking professional help is often a final attempt to get payments back on track. “It shouldn’t be this hard for people,” he says. “It’s not their fault.”
Parents are up against lots of misinformation when it comes to educational loans, Minsky and other experts say. In part, that’s because most discussion of student loans revolves around student borrowers, not their parents. And often, parents don’t understand that their own debt is treated differently than their child’s. Poor counseling and communication by student loan servicers may further prevent parents from accessing affordable repayment plans and understanding options for debt relief.
But the risks of a misstep are huge — including having your Social Security checks or other income garnished. If you’re considering taking on a federal Parent PLUS loan or other debt to fund your child’s education — or are struggling to make payments on what you already owe — here’s what you need to know:
[See: 10 Easy Ways to Pay Off Debt.]
It’s your debt. Many parents hope their child will help repay the debt taken on to fund their college education, but experts caution against relying on that strategy.
Once parents sign onto PLUS debt, which are federal loans parents can use to fund their child’s college education, it is their responsibility to pay it down. Their children may help out with an informal agreement, or even by refinancing the debt through a private lender, but both of those strategies require the full cooperation and financial health of the children. If the child is already overburdened by his or her own debt, or simply chooses not to help Mom and Dad repay the loans, then parents cannot force them to help with payments.
That means parents should think carefully about their ability to repay debt and their plans for retirement before taking on student loans. They won’t benefit from the income boost or career opportunities that come with earning a degree, so it’s imperative that parents work out whether they will be able to make payments once their child has graduated.
Estimate your exposure before taking out the loan. Don’t forget that you’re only borrowing for one year at a time. The debt can grow quickly if your child is getting a four-year degree — and even more so if he or she doesn’t graduate on time. That means your payments will continue to grow, too, especially if you defer repayment until after your child graduates.
That was the calculation Sage Van Voorhis made after her son was accepted to the University of Colorado–Boulder as an out-of-state student. When the university offered her a Department of Education-funded parent loan of $40,000, she says, she laughed and said, “Sorry, honey, no way.”
If she’d accepted those loans, she’d have $160,000 to pay off. “And that’s if he’d managed to get a degree in four years,” says Van Voorhis, in an email. “Insane.”
Instead, her son went to the University of Wisconsin–Milwaukee and paid in-state tuition under a reciprocity agreement with his home state of Minnesota.
And beyond the growing balance, don’t forget to consider interest. The high interest rate on Parent PLUS loans, currently 7 percent, will swell your principal balance, too. Parents who take the option to defer repayment until after their child has graduated will see interest compound, easily tacking on hundreds or thousands of dollars to the amount that must be repaid.
A general rule of thumb is to borrow no more than your annual income in total. Any more than that is difficult to repay over a standard 10-year repayment plan. Making loan payments while your child is enrolled in college, even if they’re just payments on the interest, will help keep interest from compounding on interest and ultimately reduce the amount you owe over the course of repayment.
[See: Should You Invest or Pay Off Debt?]
Understand that tapping the private loan market carries different risks. To score a lower interest rate, parents may choose to tap the private debt market. Lenders such as Sallie Mae or Wells Fargo offer parent student loans. Parents may also co-sign on a child’s loan, which means that they promise to take responsibility if their offspring can’t pay.
But there’s a trade-off to tapping the private market. Co-signed debt is still ultimately your responsibility if your child fails to repay, even if you are not the primary debt holder. Parents who co-sign aren’t necessarily reducing their debt burden or minimizing their risk. Plus, private lenders don’t always carry the same protections that federal loans offer. Payments on federal loans can be reduced through an income-contingent repayment plan, or a total and permanent disability discharge, which cancels debt from debtors who experience a qualifying disability. Depending on your private lender, you may not have access to all the same protections and provisions you’d have under the federal loan program.
When in trouble, consider income-contingent repayment. Generally, parents can’t take advantage of repayment programs that allow recent graduates to lower payments based on their income. But there is one workaround, known as an income-contingent repayment plan, that you may use to pay down federal student loans.
This plan allows parents to consolidate one or more Parent PLUS loans into a new loan, called a direct consolidation loan. The consolidated loan is then eligible for an income-contingent repayment plan through the federal government. Parents on this plan continue to repay their loans, with payments pegged at 20 percent of discretionary income for up to 25 years. In fact, because of how income is calculated, parents who subsist mainly on Social Security may be able to get their payments down to nothing.
For parents who are facing Social Security garnishment and other wage offsets, income-contingent repayment could be a lifeline. But many fail to apply for the program because they don’t know about it; the plans aren’t well-publicized by the DOE. “For a lot of folks, this is a paperwork issue,” says Persis Yu, a Boston-based staff attorney and director of the Student Loan Borrower Assistance Project at the National Consumer Law Center.
[See: 8 Financial Steps to Take After Paying Off a Debt.]
Don’t forget Public Service Loan Forgiveness. Even better, parents who work for an eligible public-service employer and have arranged to extend their repayment beyond 10 years or pay via an income-contingent repayment plan may also benefit from Public Service Loan Forgiveness. This program, available for workers in qualified nonprofit and government jobs, wipes out the remaining debt after applicants have made 120 on-time repayments, which is a minimum of 10 years for those who make all their payments through the public service forgiveness program. Applicants can sign up for the program for free through their student loan servicer. They’ll need to complete an employment certification form each year and when they change employers to prove that they’re working for a qualified organization and can seek forgiveness under the plan.
A word to the wise, however: The Republican student loan bill introduced in December in the House of Representatives appears to propose ending parents’ eligibility for income-contingent repayment and the shuttering the Public Service Loan Forgiveness program altogether, according to experts. Similar changes are outlined in the White House budget proposal, released this month. While it is far from clear whether these proposed changes will move forward, they’re worth keeping an eye on. If the House bill passes in its current form, current borrowers may be grandfathered into eligibility for these plans, but future borrowers shouldn’t count on these options for repayment relief.
And whatever happens in Congress, the onus is on parents to make sure that they are taking on debt they can manage, researching affordable repayment options and protecting their own financial futures. Despite the push from the higher education community, the federal government — and even your own kids — to borrow more and more, planning ahead to ensure you can make the payments you’ve committed to will be far better than searching for a mitigation strategy years down the road.
Editor’s Note: This story was produced in partnership with the McGraw Center for Business Journalism at the City University of New York Graduate School of Journalism. It is the last in a series of stories exploring the high cost and financial impact of federal student loan borrowing among the parents of college undergraduates.
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What Parents Can Do to Reduce Borrowing and Repay College Loans originally appeared on usnews.com
