4 Things Borrowers Don't Always Know About Parent PLUS Loans

Parent PLUS borrowers often struggle to manage not only the parent PLUS loan payments while trying to save for retirement, but may still be trying to repay their own student loans to boot. If you consider that these loans qualify for limited access to the income-driven repayment plans, no debt-to-income component to their eligibility and no loan limits, you've got a recipe for financial disaster for some families.

As award letters start coming in and your family is considering how to close the financial aid tuition gap, understand that while parent PLUS loans can be a smart option for some families, like all consumer debt, use them carefully and thoughtfully.

[Learn how to decode your financial aid award letter.]

Watch the Award Letter

For many families, reviewing the school award letter, which explains what grants, loans, scholarships and other aid the student is eligible to receive, can be an overwhelming experience -- especially if this particular student is the first one to attend college in the family. While it makes sense to accept the "free" money from grants, scholarships and work-study first and then consider loans, it's not always easy to tell the difference.

Parents may be caught off-guard when they start receiving bills for parent PLUS loans, when these loans are listed alongside grants and scholarships -- leading less-experienced families to assume that a PLUS loan is just another type of grant that does not have to be repaid.

Just Because You Are Approved, Doesn't Mean You Can Afford It

Many families also assume that because there is a credit check requirement to receive a Parent PLUS loan, that if they are approved they must be able to afford the payments. Not necessarily.

Only someone with some fairly large dings on their credit will be denied in the first place. This means that a family who has an estimated family contribution, the amount that your Free Application for Federal Student Aid has calculated that the family can afford to pay, of zero can also be approved for tens of thousands of dollars in Parent PLUS loans.

If you are trying to determine if your household budget can manage the Parent PLUS payments, a good rule of thumb is to assume about $120 a month for every $10,000 borrowed. Multiply that by the number of years the degree should take and by the number of children expected to pursue college. If you are borrowing just $10,000 per year and have two children pursuing four-year bachelor's degrees, you can expect a payment of almost $1,000 per month for the next 10 years.

Parent PLUS Loans Can't be Transferred to the Student

Often, families will make a deal with the student where the parent agrees to take out the PLUS loan to fill the tuition gap, but the student agrees to pay it back.

The problem is that these loans will always be under the parent's name. The only way to transfer them is through personal, and in some rare cases, private student loan consolidation. This is usually not a great idea for several reasons -- first and foremost being that taking the loan out of the federal program means losing all the federal protections and options for relief. This includes opportunities for discharge, lower payment options, public service loan forgiveness and deferments.

A recent graduate is also likely going to need a co-signer to be approved for a personal or private loan -- and often parents are the only option for that. Co-signing makes the parent equally liable for the debt, so now you've still got the financial responsibility -- but none of the fallbacks a federal loan provides.

And under the parent PLUS program, any lower payment, forgiveness or deferment options will be based exclusively on the parent borrower's situation -- even if it's the student who is making the payments.

With that said, choosing a private loan in the student's name instead is not always a good alternative. Not only are private loans less generous in their terms and options for relief, but there must almost always be a co-signer. As a co-signer, the debt will affect your credit report's debt-to-income ratio in the same way it would if you were the borrower of a parent PLUS loan.

[Find out how to transfer Parent PLUS loans to a child.]

There Are Lower Payment and Forgiveness Options for Parent PLUS Loans

Thankfully, there are some lower payment options available for parent PLUS borrowers. Consolidation, graduated repayment and extended repayment are all available for these loans. While not eligible for Pay as You Earn or Revised Pay as You Earn income-based repayment plans, Parent PLUS loans that are consolidated under the federal direct loan program can become eligible for the income-contingent repayment option.

This plan bases the payments on the borrower's income and family size. After 25 years on this plan, any remaining balance is forgiven and taxed as income. Parent PLUS borrowers who work in an eligible public service job or employer may be eligible to have the forgiveness kick in, and be tax free, after only 10 years. The eligibility for this program is based on the actual parent borrower, so if only one parent works in a qualifying job and you think this program might be beneficial to you, ensure that parent is listed as the borrower for the PLUS loans.

Parent PLUS loans can be a great financial tool for filling the tuition gap once all other available aid has been used. Like any other consumer debt, however, it's important to fully understand the terms and financial impact before taking on what could be a very large commitment.

Betsy Mayotte, director of regulatory compliance for American Student Assistance, regularly advises consumers on planning and paying for college. Mayotte, who received a B.S. in business communications from Bentley College, is a frequent contributor to ASA's SALT Blog; responds to public inquiries via the advice resource "Just Ask;" and is frequently quoted in traditional and social media on the topics of student loans and financial aid.