13 Mistakes Parent PLUS Borrowers Make
Taking on the responsibility of funding a child's education through Parent PLUS loans can be daunting and financially impactful. While these loans offer a lifeline to families seeking to bridge the gap between college costs and available funds, they come with complexities that, if mishandled, can lead to long-term financial strain.
Here's a rundown of the most common mistakes Parent PLUS borrowers often make and how you can avoid them:
Choosing the Higher Income Parent for the Loan: It might seem logical to take out loans with the higher income in the parent's name to secure better loan terms as you do with mortgages and car loans. However, since the government sets a fixed rate for all Parent Plus borrowers, the loan should be taken in the low-income parent's name.
Taking Loans in Both Parents' Names: Some families will rotate loans between parents, with one parent taking out one year's loan and the other taking out next year's loans. One parent will take out one child's loan, and the other parent will take out the next child's loan. This strategy can complicate getting loan forgiveness as both parents will have to be on an income-driven repayment, and each parent has a loan balance instead of just one parent having a higher loan balance.
Have the parent with a Pension take the Parent Plus Loan: Since most of the years you are repaying a Parent Plus loan could be in retirement, your income in retirement is very important. So even though a parent with a pension may be the lower-income parent while working, they may be the higher-income parent in retirement. Having a pension limits the options to lower your income-driven repayment plan.
Paying the Interest While the Student is in School: While paying the interest during the student's schooling period may seem responsible, it does not count towards loan forgiveness. You would be better off setting up a monthly payment play with the school for the amount you are comfortable playing.
Consolidating All Loans Together: Consolidating Parent PLUS loans in one loan seems reasonable, but it removes the double consolidation loophole (available until 7/1/2025).
Mixing Private and Parent PLUS Loans: Private loans often have higher interest rates and fewer repayment options than federal loans, complicating loan forgiveness and giving you multiple payments.
Overlooking Public Service Loan Forgiveness (PSLF): If one of the parents works for a PSLF eligible employer and plans to continue for 10 years after the student's graduation, exploring this forgiveness option could significantly reduce loan burdens.
Ignoring Roth Conversions in Retirement: Converting traditional retirement savings to a Roth IRA can reduce the taxable income used to calculate student loan payments, lowering your student loan payment and increasing your chances of loan forgiveness.
Opting for Loans in the Younger Spouse's Name: Choosing the younger spouse for loans might seem strategic, but it can lead to extended repayment periods and higher overall costs. Since federal student loans are forgiven at death and disability, taking the loans in the older parent's name is incentivized.
Choosing Loans in the Healthier Spouse's Name: Similar to the previous point, health status can change unexpectedly. Since federal student loans are forgiven at death and disability, we don't want to take the loans in the parent's name with the longer life expectancy.
Underestimating Repayment Obligations: Parents and students should clearly understand repayment terms after graduation to avoid financial shock.
Not Considering Affordable Education Options: Before committing to expensive universities, explore more affordable alternatives to minimize the need for extensive borrowing.
Contributing to Roth 401k While Paying Student Loans: Contributing to a Roth 401k while managing student loans may not be financially optimal. A better option is contributing to a Traditional 401k, which will lower your taxable income and reduce your student loan payment. You will be better off considering a Roth IRA conversion during retirement instead.
Navigating Parent PLUS loans requires careful consideration and planning. Families can better manage education costs while safeguarding their financial futures by avoiding these common pitfalls and seeking professional financial advice when necessary. Remember, informed decisions today can pave the way for financial security tomorrow. Please remember to consult your tax advisor.
There is no assurance that the techniques and strategies discussed are suitable for all borrowers or will yield positive outcomes. None of the information in this document should be considered as tax advice. You should consult your tax professional for information concerning your individual situation.