Parents in debt for children’s college can get forgiveness

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By Anna Helhoski | Nerdwallet

College students take out loans as an investment: they will likely graduate and reap the rewards – income that will help them pay off that debt, and more.

But parents borrow for their children without the promise of higher income. And legally, they are the ones who have to pay.

Federal Parent PLUS Loans are easy to obtain: Colleges often list them alongside grants and undergraduate loans on financial aid award letters. They lack traditional underwriting requirements for credit history and income. There is also no limit to the total amount a parent can borrow.

These factors make it easier for parents to borrow than they can afford.

“I have the impression that parents feel more pressure to take on unaffordable debt at university than they would for anything else,” says Betsy Mayotte, president and founder of the Institute. of Student Loan Advisors.

Parent PLUS loans also offer fewer options for making payments manageable, and navigating them is more complicated.

“Accessing all of these things is not insurmountable, but when you have all of the things together there are many obstacles that parents have to overcome to gain relief,” says Rachel Fishman, deputy director of research in the policy program education. at New America, a non-partisan think tank.

Here’s why parent PLUS loans can grow fast, and how struggling parent borrowers can lower their payments and ask for forgiveness.

Why Parent PLUS Loans Are a Repayment Problem

Parent PLUS loans were originally intended to help parents from middle and upper income backgrounds who did not have cash on hand but had assets, says Kristin Blagg, senior research associate at the Center on Education Data and Policy from the Urban Institute. , a non-profit research organization. But over time, the target borrower for these loans has shifted to middle and low income families.

“The logic of ‘OK, you have assets you can lean on to pay off that debt’ is crumbling for low-income families,” says Blagg.

Parent PLUS loans are also the most expensive type of federal loan, currently carrying an interest rate of 6.28% for the 2021-2022 school year, compared to 3.73% for undergraduate loans. And they carry a higher origination fee – currently 4.228%. Parents who meet traditional income and credit standards can get private student loans at much lower rates with no set-up fees, but parents with low income or bad credit cannot.

Over the past seven years, parent PLUS loan debt has grown from $ 62.2 billion to $ 103.6 billion, a 67% increase, compared to a 39% increase in student loans undergraduate.

While there is little information on parent borrower default rates, Mayotte and Fishman say there is enough anecdotal evidence that some borrowers struggle to repay these loans.

Lawmakers, student loan debtors, and activists lobbied Washington to cancel loans of up to $ 50,000, but no specific proposals were submitted to Congress and no guarantees that PLUS loans would be included.

Current opportunities for borrowing parents

Here are the options available to parents now:

Pursue the rebate of income based repayment. Income-Based Repayment is a safety net for all federal student loan borrowers, but holders of PLUS parents can only access the most expensive of the four plans: Income-Based Repayment or ICR. This caps payments at 20% of your discretionary income and lasts for 25 years.

The ICR is particularly useful for older parents who, when they retire, can expect to have less income than they had when they took on the debt. After 25 years of payments, the borrowing parents will have the rest of their debt canceled.

Qualify for the Civil Service Loan Discount. The Public Service Loan Forgiveness provides the option to forgive after 120 payments while the parent is working for a qualifying nonprofit or government employer.

However, this cancellation is difficult to achieve: Analysis of federal data shows that only 1.16% of all applications have been approved by April 29, 2021. It is not known how many of these applications or approvals are PLUS borrowers.

Parent PLUS borrowers must first consolidate their loans into a direct consolidation loan and register for income-tested repayment in order to make eligible payments.

Use the closed school and the borrower’s defense. When schools suddenly close or engage in deceptive practices, student loan borrowers, including parents, are not necessarily required to repay their debt.

Under the closed schools discharge rules, if the school closes while a student is still present, some or all of the parent PLUS loans used to pay for the program would be released as part of the closed schools discharge, according to the Ministry of Education.

If a student loan borrower is misled by their school or the institution has violated state laws, parent loans can be canceled through a forgiveness program called the Borrower’s Defense. refund. Under the Borrower Defense Guidelines, Parent PLUS Loans would also be canceled if a student’s application was approved.

Qualify for the disability discharge. Parents borrowers who become disabled may be eligible for full and permanent disability release. Eligible borrowers must have a physical or mental disability that prevents them from working.

The Social Security Administration or a doctor must verify that the physical or mental impairment meets certain conditions.

Refinance privately on behalf of your child. The only other way to get rid of your debt is to refinance on your child’s behalf with a private company. By doing this, your child would become legally responsible for paying off the debt you originally incurred.

Only a few private lenders do this, and if you do, the loan will no longer be eligible for income-tested repayment or the potential remission available by the federal government. Your child will need to have strong credit, a history of on-time loan repayments, and an income to pay the payments.

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Anna Helhoski writes for NerdWallet. E-mail: anna@nerdwallet.com. Twitter: @AnnaHelhoski

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