Beware the Parent PLUS Loan

Student loans can financially cripple students as they prepare to enter the real world. But it seems that more and more we’re hearing about parents also being burdened with ridiculous amounts of student loan debt.

Why is this happening? You can thank the Parent PLUS Loan, something that Barry from New Jersey is unfortunately very familiar with.

In hour two we’re sticking with the student loan theme as we’re joined by David Klein and Kelly Peeler from CommonBond, a company that positions itself as a place for simpler, smarter student loans for a brighter future.

While taking out loans for business school, co-founder David found himself asking a lot of questions: Why is the process so confusing? Why is the customer service so bad? Why are the interest rates so high? Isn’t there a better way for people to borrow for school?

Turns out he wasn’t alone as figures now show that students in the U.S. are struggling to pay down over $1.5 trillion in debt.

CommonBond was founded in 2012 to help relieve that burden, and since then have funded over $2.5 billion in better student loans. Their approach is no big secret: lower rates, simpler options, and a world class experience, all built to support you throughout your student loan journey.

Kelly and David firmly believe that student loans should be for fulfilling your dreams, not emptying your bank account. They’re helping you get there by lowering the cost of school and simplifying the process with no more stressful applications or being treated like an account number.

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Should you go into Student Debt to Pay for College?

With the cost of tuition, fees, room and board at public four-year colleges running around $20,000 -- and up to $70,000 for some elite private schools, how can families foot the steep education bill without getting crushed by student debt? Now that college acceptances are in, it's time to figure out how to pay for that coveted degree. Before you agree to the financial award offered, know that if your family finances have changed since you completed your FAFSA forms, due to a job loss, high medical expenses or caring for an elderly parent, you can appeal to get a better package. You will need to gather supporting documentation and be a bit of a squeaky wheel, but it is well worth the time and energy.

If the prospective student has received a better package from an equally ranked school, it is worth inquiring as to whether a match is available. In this case, financial aid officials say that it is better for the student to make the appeal directly, rather than have the parents call.

You should also know that the financial offers are only good for the first year of borrowing--families have to apply annually for aid. That means that your award could drop in the subsequent three years, which is why you should ask the college how much its costs could change. You can research whether a reduction is likely by using the Education Department’s College Navigator,  which highlights what percentage of first-year students at each school, earns scholarships compared with the entire undergraduate student body.

The biggest problem that families have is that there is no uniform standard for how colleges detail true net cost of earning a degree. That puts the onus on families to parse through the likely four-year total cost of attendance (tuition, fees, room, board, books, travel), the amount of financial aid available and the money that will be accessed through loans and work-study.

Once you have nailed down the costs, then it’s time to decide whether or not you will borrow money to finance the degree. Students should explore federal loan options before private ones, because most private loans have variable interest rates that can rise substantially in the future and only federal loans are eligible for different kinds of loan repayment options.

Colleges also often include federal parent PLUS loans in the aid package, but those come with a hefty loan origination fee of nearly 4.3 percent. Parents should check out the private sector too and remember that parental borrowers have to start making monthly payments immediately. Finally, education experts suggest that students only borrow a total of what they can earn in their first full year of employment and parents should be careful not to blow up their own retirement plans to finance education.

Because so many parents are trying to juggle competing financial goals, many grandparents have gotten into the act. While a grandparent’s assets are not included when colleges determine eligibility for financial aid, if a 529 plan is established in the grandparent’s name for the benefit of the grandchild, it can negatively impact the student’s financial aid award.

The reason is that when money is withdrawn to make a payment on behalf of the beneficiary of the plan, students must disclose those amounts as income, which can reduce a student’s aid eligibility significantly. In order not to diminish the ability to receive aid, grandparents should consider gifting the money to the parents, who can then deposit the gift into their own 529 accounts. Experts note that it makes sense to wait until after the aid has been determined before making the gift.

Student loans: What you need to know

A recent Sallie Mae study found that parents are contributing less to fund total college costs, which means that students are borrowing more. Total student loan debt , which includes Federal and private loans made to students and their parents, is now estimated to be nearing $1.2 trillion – or an average of $26,000 per student who graduated in 2013. The reason is obvious: as the costs of education rise, families have been forced to borrow more money to earn those coveted degrees. Student debt has become pervasive: 19.6 percent of adults over the age of 20 owe money on student loans, and 57 percent of them are worried about repaying this debt, according to a study by the Urban Institute. Unfortunately, the mounting student debt is likely to become even harder to repay in the future, now that Congress has linked new federally subsidized loans to the 10-year treasury yield. Those yields have spiked from 1.61 percent in May to over a two-year high of 2.95 percent. Most economists expect rates to rise even more in the future as the economy improves and the Federal Reserve reduces its monthly bond purchases.

What’s the answer? Students and their families should be very careful not to assume too much debt for education. A good rule of thumb is to keep total education debt less than the borrower’s projected first year’s salary. Of course, income varies considerably by profession. Engineering and computer science jobs can see first year salaries of over $75,000 per year, while entry level clerical jobs can be just half of that.

Another way to keep a lid on your education tab is to consider alternatives to traditional four-year colleges.  Two-year technical degrees from community colleges can be incredibly valuable; with average first-year salaries often more than graduates with bachelor’s degrees in some areas, according to collegemeasures.org.

For those who are jumping into the student loan fray, here are answers to 8 important questions about student loans:

1) What are the different types of college loans? There are three ways to borrow for education: Student loans (Federal Stafford and Federal Perkins loans), parent loans (PLUS loans), and private student loans.

2) What is a Stafford loan? A Stafford federal loan is awarded to students who are enrolled at least half time in college, complete the (dreaded) Free Application for Federal Student Aid and demonstrate financial need. Two-thirds of these loans are awarded to students with family adjusted gross income of under $50,000. Stafford loans come in two flavors -- subsidized and unsubsidized. With a subsidized loan, the government pays the interest while students are in school; with an unsubsidized loan, the student pays the interest and can defer payment until after graduation. So subsidized Stafford loans are preferable to the unsubsidized variety. The term is 10 years, although other terms are available via consolidation.

3) What is the interest rate on Stafford loans? Dating back to 1992, Congress set the interest rate on federal student loans at fixed rates ranging from 6 percent for loans issued in the 1960s to 10 percent for loans issued between 1988 and 1992. By the end of 2006, student loan rates were at 6.8 percent. The College Cost Reduction and Access Act of 2007 phased in a reduction of the interest rates on subsidized Stafford loans for undergraduate students starting July 1, 2008. The phase on newly originated undergraduate loans was 6 percent for 2008-09; 5.6 percent for 2009-10; 4.5 percent for 2010-11; and 3.4 percent for 2011-12 and 2012-2013. The rate is scheduled to revert back to 6.8 percent for the 2013-2014 school year unless Congress agrees to keep it where it is, which it is expected to do.

4) How much can an undergraduate borrow through a Stafford loan? 

Dependent Students	Annual Loan Limits
First Year	$5,500 ($3,500 subsidized/$2,000 unsubsidized)
Second Year	$6,500 ($4,500 subsidized/$2,000 unsubsidized)
Third Year and Beyond	$7,500 ($5,500 subsidized/$2,000 unsubsidized)

5) What is a Perkins loan? A Perkins loan is a subsidized federal loan offered though colleges. It works like this: The U.S. Department of Education provides funding to the school; the school determines which students have the greatest need; and then the school combines federal funds with some of its own funds for Perkins loans for qualifying students. The government pays the interest on the loan while the student is in school and also during the 9-month grace periods. There are no origination or default fees, and the interest rate is 5 percent for the 10-year repayment period.

6) What is the Federal Parent Loan for Undergraduate Students (PLUS)?PLUS loans allow parents to borrow money for uncovered education costs. Unlike with Stafford or Perkins loans, larger loan amounts are available up to the total cost of college, at a fixed interest rate of 7.9 percent. Interest is charged from the date of the first disbursement until the loan is paid in full. Credit checks are conducted for the loans, and PLUS loans are the financial responsibility of the parents, not the student.

7) What is the difference between a PLUS loan and a private loan? Private lenders may offer more flexible repayment options and perhaps a lower interest rate. However, more private loan rates are variable, which means the cost of the loan can rise in the future.

8) Can I refinance an existing loan? If you have a federal loan, then the process is pretty easy – just go to the government’s re-fi web site,  and determine if the current rate is lower than your current combined rates. The process is much more difficult for a private loan, especially for recent graduates who have not yet established a solid credit history. Additionally, there are only a half dozen private consolidation loan programs and it is notoriously difficult to qualify for a re-fi with them. The Consumer Financial Protection Bureau recently issued warnings about refinancing student loan debt.

Student loan basics

With nearly $1 trillion in total student loans outstanding, its clear that many students will have to borrow money to earn these degrees. The key is to keep total student loan borrowing levels at or below those first year salaries, so that recent graduates don’t drown under the weight of repayments. That may mean foregoing an expensive school or working harder at finding grants and scholarships, but the upside is freedom from a tremendous financial burden. Here are answers to 8 important questions about student loans, much of which I created for CBS MoneyWatch.com.

1) What are the different types of college loans? There are three ways to borrow for education: Student loans (Federal Stafford and Federal Perkins loans), parent loans (PLUS loans), and private student loans.

2) What is a Stafford loan? A Stafford federal loan is awarded to students who are enrolled at least half time in college, complete the (dreaded) Free Application for Federal Student Aid and demonstrate financial need. Two-thirds of these loans are awarded to students with family adjusted gross income of under $50,000. Stafford loans come in two flavors -- subsidized and unsubsidized. With a subsidized loan, the government pays the interest while students are in school; with an unsubsidized loan, the student pays the interest and can defer payment until after graduation. So subsidized Stafford loans are preferable to the unsubsidized variety. The term is 10 years, although other terms are available via consolidation.

3) What is the interest rate on Stafford loans? Dating back to 1992, Congress set the interest rate on federal student loans at fixed rates ranging from 6 percent for loans issued in the 1960s to 10 percent for loans issued between 1988 and 1992. By the end of 2006, student loan rates were at 6.8 percent. The College Cost Reduction and Access Act of 2007 phased in a reduction of the interest rates on subsidized Stafford loans for undergraduate students starting July 1, 2008. The phase on newly originated undergraduate loans was 6 percent for 2008-09; 5.6 percent for 2009-10; 4.5 percent for 2010-11; and 3.4 percent for 2011-12 and 2012-2013. The rate is scheduled to revert back to 6.8 percent for the 2013-2014 school year unless Congress agrees to keep it where it is, which it is expected to do.

4) How much can an undergraduate borrow through a Stafford loan? 

Dependent Students	Annual Loan Limits
First Year	$5,500 ($3,500 subsidized/$2,000 unsubsidized)
Second Year	$6,500 ($4,500 subsidized/$2,000 unsubsidized)
Third Year and Beyond	$7,500 ($5,500 subsidized/$2,000 unsubsidized)

5) What is a Perkins loan? A Perkins loan is a subsidized federal loan offered though colleges. It works like this: The U.S. Department of Education provides funding to the school; the school determines which students have the greatest need; and then the school combines federal funds with some of its own funds for Perkins loans for qualifying students. The government pays the interest on the loan while the student is in school and also during the 9-month grace periods. There are no origination or default fees, and the interest rate is 5 percent for the 10-year repayment period.

6) What is the Federal Parent Loan for Undergraduate Students (PLUS)?PLUS loans allow parents to borrow money for uncovered education costs. Unlike with Stafford or Perkins loans, larger loan amounts are available up to the total cost of college, at a fixed interest rate of 7.9 percent. Interest is charged from the date of the first disbursement until the loan is paid in full. Credit checks are conducted for the loans, and PLUS loans are the financial responsibility of the parents, not the student.

7) What is the difference between a PLUS loan and a private loan? Private lenders may offer more flexible repayment options and perhaps a lower interest rate. However, more private loan rates are variable, which means the cost of the loan can rise in the future.

8) Can I refinance an existing loan? If you have a federal loan, then the process is pretty easy – just go to the government’s re-fi web site,  and determine if the current rate is lower than your current combined rates. The process is much more difficult for a private loan, especially for recent graduates who have not yet established a solid credit history. Additionally, there are only a half dozen private consolidation loan programs and it is notoriously difficult to qualify for a re-fi with them. The Consumer Financial Protection Bureau recently issued warnings about refinancing student loan debt.