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Parent PLUS Loans “Cheat Code”: Too good to be true?

Family Graduation

Most college funding conversations center exclusively on the up-front costs:

“How do we pay for this?” 

“How many loans do we need?” 

  “Which loans should we take out?”

While important questions, they often neglect the most important financial question of all:

       “How will we pay these loans back?” 

It’s not a fun question to answer, but it can’t be ignored. Without a clearly established repayment plan, parents can jeopardize their retirement in potentially irreparable ways.  

Amid all of the pomp and circumstance, college-bound families must remain future-focused. Long before they take out loans and load themselves up with debt, they need to know exactly how they’ll pay it back and have confidence that they can successfully do it. 

The “we’ll cross that bridge when we get to it” mentality is all-too-tempting and dangerous.  

At College Aid Pro™, we’re kicking-off the repayment conversation to help families protect their financial future. In today’s blog, we’re focusing on Parent PLUS Loans and the “cheat code” that we have been hearing so much about.  We have never been big on “cheating” at CAP.  These strategies could absolutely help your clients save significant sums of money as we will explore,  we want to help you understand the entire process.  

Parent PLUS Loans: A Brief Overview

PLUS loans are available to parents of undergraduate students (as well as to graduate and professional students). Undergraduate students cannot directly access PLUS loans, which appropriately stands for Parent Loan for Undergraduate Students (PLUS). 

For families that have a funding gap in their college plan, PLUS loans are easy to qualify for,   have virtually no income requirements and are held out as “financial aid” on the financial aid award letter to help families make the ends meet.  

CAUTION!!! These loans are the biggest trap in the college funding process. At the click of a button all of your college funding woes are instantly cured.  No one is there showing you the 4 year total you will need to take or the monthly repayment amount when the loan comes due like they do for any other loan you take out.  Nope, just click here and your college bill is paid for you.  So they would have you think. 

Parent PLUS loans will pay up to the full cost of attendance less other financial aid on everything from room and board to tuition, books, fees, and more.  Does this sound to good to be true?  It is!  Parent PLUS loans offer a fixed interest rate — 6.28% for loans disbursed between July 1, 2021 and June 30, 2022.  Relative to other loans this is not a good interest rate and it also comes with a hefty 4.228% up front fee.  So, in year one you are paying Uncle Sam over 10% for the privilege of using his money.  

While Parent PLUS loans aren’t for everyone, they can be a good stop gap for some families — especially for those who can take advantage of the lesser known “cheat code.” 

The Four Repayment Plan Options

While most student loans have a six-month grace period, families have to start repaying Parent PLUS loans right away (or as soon as the full loan has been disbursed). 

Parent PLUS loans have four repayment plans to help you get started:

The Standard Repayment Plan, where you can pay your loans off with fixed monthly payments over a span of ten years. 

RULE OF THUMB – For every $10,000 you take out in student loans, you will owe roughly $100/month on the standard 10 year repayment schedule.  

The Graduated Repayment Plan, where you can begin paying with smaller payments that incrementally increase over a period of ten years. 

The Extended Repayment Plan, where you can choose to pay fixed or graduated payments over a twenty-five year term.

The Income-Contingent Repayment Plan, where you can pay either a percentage of your discretionary income or what you would pay on a twelve-year plan, whichever is less expensive. After twenty-five years, you might also be eligible for student loan forgiveness.

While these are all great options, the Income-Contingent Repayment (ICR) could be a game changer for certain families. It also holds the “cheat code” we’re finally going to tell you about. 

The Parent PLUS Loan “Cheat Codes”

Let’s say one parent has a solid credit score and a very low annual income. They easily qualify for a Parent PLUS loan and apply the money to their child’s education. Then, when the loan goes into repayment, the parent explores the ICR option and sets up a plan based on the income they take home.

Given the parent’s salary, their monthly payments could actually be as low as zero dollars.

And after 25 years go by, that same parent will become eligible for loan forgiveness, which wipes out the remaining balance of payments. Even though the forgiven debt will be considered taxable income, that parent will still have saved tens of thousands of dollars (if not more). 

Best of all, thanks to the negligible payments associated with the Income-Contingent Repayment Plan, the family will be in a position to continue saving for retirement as they approach their loan forgiveness date. 

CAUTION!!!  Yes, this strategy could work for a very small percentage of people.  But think this through.  You need to keep your income low for the next 25 years to have this strategy really pay off.  If you have a client already on a fixed income and in retirement and you know what that will look like for the next 25 years then this strategy can absolutely make sense.  But, there is no guarantee that this rule will stay the same for the next 25 years.  That is a long time for Uncle Sam to not figure out this little loophole.  

To Cheat or Not to Cheat

As it turns out, there’s actually no cheating involved in the Parent PLUS loan “cheat codes.” 

It’s totally above board and consistent with the law. You just have to know what the rules are in order to get the most out of them. 

We encourage you to explore all available options for every college-bound client on your roster.   Don’t take the bait on Parent PLUS loans and people trying to sell this “cheat” as the greatest thing ever.  Make sure you and your clients fully understand what the total loan and total loan repayment will be.  

Have questions? Don’t hesitate to reach out — we’re happy to help!

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