Parent’s PLUS student loans and Bankruptcy
Updated: Oct 15, 2019
First, let’s talk about what a “Direct PLUS”, also known as a “Parent’s PLUS” loan, actually is. Often, when a child applies for school and fills out a FAFSA (Free Application for Federal Student Aid), a school will respond with a financial aid package that “sneaks” in the PLUS loan option for the parents, which makes the financial aid package very confusing. A PLUS loan is a loan for a party other than the student to take out to fund the student’s education, most often the parents but can also be the grandparents. These loans are remarkably easily granted, relying only on a cursory credit check and not examining the guaranteeing party’s actual income or other debt payments to determine if that person can actually afford the required payments on this new loan. This loan is solely the responsibility of the person that takes out the PLUS loan, NOT the student’s.
Why is this a bad thing? PLUS loans are treated as student loans, even though the person taking out the loan is NOT the student. This means that they cannot be discharged in bankruptcy*. Interest rates may be very high. There are no grace periods or repayment plans. There is also no limit on the amount that can be taken out as a PLUS loan, often allowing parents and sometimes grandparents to get in way over their heads with loans they can never afford to repay. This can result in garnishments, law suits and even affect your Social Security benefits.
What else can we do to help? It is normal for a parent to feel responsible to finance their children’s college education, but one must remember that by putting their financial future and retirement at risk, they are not helping a child. Getting your child’s “promise” to repay a PLUS loan once they graduate can also backfire, tearing a family apart when a child is unable to pay.
Instead of a PLUS loan, have your child first request a financial aid package break down from the school that does NOT include a PLUS loan option. If, after this, there is still a shortfall in money available, have the student opt for a private student loan from a bank. While private student loans may have higher interest rates and less favorable repayment terms, they can be decent options. Remember, you can always help your child with payments on student loans in their names, but taking out a loan in your own name to fund another adult’s education, even if it is your child’s education, is a risky option.
As always, make sure any new college student knows what repayment will look like under the student loans they will be taking out in their names. Make sure any program the student is enrolling in actually will have the job outlook to be able to repay these loans while still providing money to cover necessities in the future. Once you have these numbers, it may make sense to re-visit with the student whether attending the school makes financial sense for their future.
*Note that if you are in bankruptcy, like an active Chapter 13 bankruptcy case, you must have Court permission to take out any new loans while in the active case. The Court would be unlikely to grant permission to debtors to take out a loan with the above terms for an adult child. Discuss with your attorney other options.
If you are in over your head on student loan or PLUS loan payments, call today to discuss financial options. 269-381-4471