Ever heard of Parent PLUS loans? These financial products are designed to help pay for their child’s college education. More specifically, they’re federal loans – and they have many risks. Here’s what they are, what they do and why you should proceed with caution.
Remember the enormous problems in the subprime mortgage sector a few years ago, before the bottom fell out? Consider these subprime student loans. You don’t have to prove much of anything, including proving you can actually pay the funds back. In the mortgage sector before 2008, these were called “stated loans” and a potential borrower didn’t have to prove how much he earned, how much he had in the bank or even how much his debts were. They were simply “stated” on the application. Even when underwriters questioned balances on credit reports, loan officers would often take the word of their borrower when he said that debt had been paid off. Sounds, crazy, right? It happened far more often than many realize and as a result, many borrowers moved into their dream homes, only to see them foreclosed on, usually within five years.
The difference, though, in these student loan products is parents can have their wages garnished, their income tax refunds rerouted to the lender and even social security benefits aren’t safe – they too can be seized. Your credit history plays no role in the approval process with only one exception. The federal government doesn’t check incomes or employment status before approving these loans, either. No concerns about DTI, no questions asked period. The only exception is PLUS borrowers can’t have an “adverse credit history,” which equates to not being 90 days or more late on an open bill or having a bankruptcy, foreclosure or repossession within the previous five years. And yes. It’s the federal government.
Not only that, but the government is able to do things traditional debt collectors will likely never have the luxury of doing:
- Seize your state and federal income tax refunds.
- Garnish the borrowers wages without a court order.
- Claim at least a portion of your social security benefits.
- Hound your forever – there government doesn’t recognize statute of limitations on these loans.
- Hold hostage the borrowers ability to gain his or her professional licensing – nursing, attorney, etc. Worse, if the borrower already holds a license, the government can see to it that it’s revoked.
Sounds more like some bizarre mob movie, yes?
Many parents find the absence of limits on the loans too tempting to pass up – and let’s face it, parents want to be able to send their kids to college. You can even borrow enough to cover the four years in their entirety, including dorm fees, tuition, books, meal plans – you name it, if it has anything to do with a child’s college education, you can include it.
And if you’re thinking you need to have a bit of money in the bank already, think again. One single mother earns $25,000 a year and easily was approved for a $17,000 loan for each year her daughter attended college. A full 20% of PLUS borrowers who secured loans also received Pell grants. As you may know, Pell grants are typically reserved for low income families. It’s not surprising low income borrowers turn to these loan products, either.
Department of Education
According to data from the Department of Education, monthly payments of those in the bottom 10% of incomes for these PLUS loans gobbled up a whopping 38% of those incomes. So is it possible borrowers simply don’t understand the credit terms? Most believe it is. That, and the fact they’re concerned they won’t be able to send their kids to college any other way, are powerful incentives for these parents who don’t want to see their children struggle financially and who believe a college education is the one sure fire way of ensuring that.
Make no mistake – there is no limit on how much interest these loan programs can demand. Fall behind, and you’ll make late payment fees, too, on top of the 4% origination fees at the start of the contract. Bottom line – proceed with extreme caution. There are no alternatives available if you are unable to meet your loan terms. It’s overwhelming and why it’s not illegal has many consumer advocates wondering how the government is able to play by different rules when it comes to the people it is supposed to serve. Even if you opt for these products at a time when repayment is within reach, a change in your financial standing could have very long term effects.
So what are your thoughts? Have you taken out PLUS loans? Would you be willing to take the risk if it were the only option to send your child to school? The fact is, more parents are turning to these high risk financial solutions because there’s simply nothing else they can do. Tell us your story and share your thoughts.
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