What would you do if $37,172 miraculously fell into your lap at this very moment? How would you spend this small fortune?
Of all the lavish options running through your wishful head, did one include completely paying off your student-loan debt?
That’s no fun, right?
Well, for 44 million graduates in the United States last year, that would be a very viable option. According to U.S. student loan debt statistics, Americans owe a staggering $1.3 trillion in student-loan debt, and the average 2016 graduate owes a whopping $37,172.
Knowledge is most definitely power, but no one ever said knowledge is cheap. It goes without saying that the burden of debt can be stressful and worrisome. Unfortunately, the headache of paying back a student loan can also fall on the shoulders of parents.
There are a few options when it comes to paying for college. These financial-aid options include grants, scholarships, loans, and work-study programs. More than two-thirds of students receive some sort of financial aid, and more times than not, this money is borrowed from one or more lenders.
One way of borrowing money for college comes in the form of federal Parent Plus loans. These are loans made directly to the parents of students. Needless to say, the parent is fully responsible for paying off the debt.
Right off the bat, let me warn you, these loans are not quite ideal and should be obtained as a, cautious, last option. By last option I mean when all other federal resources have been exhausted. While these loans are virtually unlimited, they are handed out without regard to a parent’s ability to pay them back. A parent’s income is not taken into account.
To a lot of parents, this may seem like a “quick-fix” opportunity, and this is why 4.9 percent of parents whose child is attending a four-year public school fall into this trap. Remember, if something sounds too good to be true, it probably is too good to be true.
The terms for a Parent Plus loan are a lot less generous than other student loans. First off, the interest rate is 6.3 percent with origination fees of just over 4 percent. Secondly, there are a limited number of repayment options and, horrifyingly, Parent Plus borrowers are not eligible to repay through the income-based repayment programs. This is where the nightmare of repaying the debt begins.
The first payment is due either 60 days after the loan is disbursed or during the application process. The parent may elect to have the payments deferred until after the student has graduated, but either way, when that bill comes, it will most likely be astronomical.
Many parents pay upwards of $1,000 a month to repay these loans, and to the average American family, that screams financial disaster. Let’s not forget, many college students don’t complete their degree in four years. If a student isn’t responsible, or not all that driven, it may take five or six years for him or her to graduate. And guess what that does to the monthly payments?
What if you can't afford to make these outrageous payments? That’s just tough luck because the government will come after you in any way possible. The federal government is able to garnish wages, rescind tax refunds, and even dock Social Security checks in order to collect the debt.
So, once again, be careful when considering a Parent Plus loan. Do your research the best that you can because data on these loans is hard to find. It’s as if they want to keep the statistics secretive.
Well, imagine that.
Alexander Joyce is president and CEO of ReJoyce Financial LLC (www.ReJoyceFinancial.com). He’s also a Safe Money and Retirement Income Planning specialist, and has hosted radio shows, such as “The Safe Money and Income Radio Show” and “The Ask Mr. Annuity Radio Show.” Joyce is a licensed professional in Indiana and specializes in working with people who are near retirement or who are already retired, with wealth management, income planning, and asset protection strategies.
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