Friday Rant (Opinion Piece)

When it comes to repaying loans for higher education it is often the student we think of first, and with good reason, but what about those parents who have over extended themselves for their children? Some of them are in debt way over their head. What can they do to help their cause? If you are thinking about an Income-Based repayment plan, think again. You are not eligible.

Students who hold a Stafford, Grad Plus, or a consolidated bundle of both are eligible to enroll in an IBR plan if they demonstrate financial need, according to a federal formula that essentially limits monthly payment to no more than 15% of discretionary income. Borrowers can also report a $0 income if they are unemployed as well. $0 payments are allowed under the IBR plan which is fantastic. So what about the parents?

Are some parents not unemployed? Why are they not eligible for the same assistance? It sounds like a double standard to me. These parents who work hard their whole life and have hit hard times because of the economy are told, sorry, deal with it? That’s not right.

Still, a parent can utilize the 36 months worth of deferment time they are extended, but that just delays the inevitable and capitalized interest will continue to roll. It’s like trying to plug a hole in the Titanic with some taffy.

Don’t get me wrong, I love students and want them to have every advantage when it comes to paying off high school loans, but let’s not forget about Mom and Dad who have given us so much.

Parent Plus loans serve as an excellent loan option for parents today looking to aid their student with the cost of higher education. That said, Parent Plus loans are not the only option that parents have. Here are the most common three options that parents consider when helping out their student(s) with school.

1. Parent Plus loan: A federally back loan with an 8.5% fixed interest rate for the life of the loan. This loan is fully deferrable while the student is in school but will remain in the parents name until the loan is paid in full.

APPLY FOR A PLUS LOAN

2. Private student loan: This is a loan type that parents will co-sign for their son or daughter. The primary responsibility for repayment falls on the student, though the co-signers credit can still be damaged if payments are not made. This loan type is fully deferred while the student is in school. The interest rates are variable and are dependent on the index the lender is using and the credit of the applicant. In some instances after a designated amount of on time payments from the student (36-48 months) is reached the parent can be removed from the loan application with a written request.

APPLY FOR A PRIVATE LOAN

3. Home equity lines: With rates at 20-year lows many parents have elected to take out a home equity loan. For some this is the lowest interest rate of the three with the opportunity to fix this rate. There is no deferment time and the loan repayment would begin within 30-60 days. This loan would be the parents responsibility to repay as the student would not be attached to the application.

Parents must complete a Plus loan application and Master Promissory Note to be eligible for a Parent Plus loan, but completion of the FAFSA may not be required. Parent borrowers only need to complete a FAFSA if the school the child is enrolled in requires it.

A parent may obtain additional loans for the same dependent student based on the original MPN for up to 10 years from the date the parent first signed it.

One of the most devastating things in life is losing a loved one. I lost my Dad earlier this year to a terminal illness, and it was the saddest day of my life. To make matters worse for some grieving students a parents death in the middle of the school year impacts their financial aid, and in particular, the Parent Plus loan.

Parent Plus loans are generally taken out for the entire academic years (fall and spring) just before the fall semester begins. The funds are then sent to the school in two disbursements. One disbursement is applied in the fall and the other is applied in the spring. If a parent passes away during the fall semester the second disbursement must be cancelled as a borrower can not take out additional funds after death.

However, the first disbursment as well as any other Parent Plus loans the borrower had previously taken out would be discharged.

One of the big changes in the world of federal loans over the past 18-months impacted the Parent Plus loan repayment time frame. It had always been that repayment on a Plus loan began once the loan was fully disbursed, however, that all changed in 2008.

Plus loan borrowers now have the option to defer repayment for as long as the student is enrolled in school half-time or greater. In addition parents enjoy an additional six months of grace from the time the student ceases to be enrolled at least half-time. There is one downside, however, the loan value keeps climbing.

The Plus loan begins accruing interest from the moment it is disbursed. It is advisable to make at least interest only payments if you are able during this deferral state, otherwise the loan will continue to capitalize each quarter inflating your loan balance considerably.

Talk to your lender about interest only payments while your child is in school.

For any parent wishing to take out a Parent Plus loan to help fund their childs education there are three qualifications that all MUST meet.

1. You must be a U.S. citizen or eligible noncitizen
2. You must not be in default on any federal student loan
3. You must not owe a refund on a federal education grant

Assuming you are a U.S. citizen who is not in default with a federal student loan or owe a refund on a federal education grant you must then pass the credit check, though the standards of credit have dropped significantly over the past 18-months.

In today’s uncertain world where every dime counts and most are on a tight budget the Parent Plus loan makes good economic sense as it provides a fixed interest rate for its borrowers. That is an important benefit to note because most private student loans, which parents co-sign for their students, are variable interest rates. Wouldn’t you rather have the piece of mind of knowing what your monthly payment will be? Private student loans fluctuate with the market – Parent Plus loans do not.

So while private student loans may offer you a lower variable interest rate now, it may be worth it to take out a Parent Plus loan which holds a higher fixed interest rate to protect yourself later.

Parent Plus Loan Application

The Parent Plus loan is a great option for parents to help their children with the cost of education, however, if your student is 24 or older they are viewed as an independent through the schools eyes which means the Parent Plus loan option is not a viable one. However, that certainly does not mean that your student is out of loan options.

If your student is viewed as independent the next best loan option is a private student loan which isn’t the worst thing. Actually, in some ways this loan alternative actually helps the parent because the parent is listed as the secondary borrower on the loan and not the primary. With the Parent Plus loan the parent is the primary. Interest rates are also at historic lows making this a great time to take out a private loan. In addition, repayment does not begin until after the student graduates.

APPLY for a Private Loan Today!

Calculate your EFC

The EFC, or Expected Family Contribution is the amount you and your family is expected to contribute towards college education.

The federal government gives you an official federal EFC calculation after you have complete the FAFSA form.  This calculation determines family resources available from a family’s income (less allowances for taxes and living expenses) and assets (less allowances for retirement).  A percentage of these available amounts are earmarked as EFC. Read more about the Cost and your EFC.

The EFC formula is used to determine the EFC and ultimately determine the need for assistance from the following types of federal student financial assistance: Federal Pell Grants, subsidized Stafford Loans (though the William D. Ford Federal Direct Loan [DL] Program or through the Federal Family Education Loan Program [FFEL]), and assistance from the “campus-based” programs—Federal Supplemental Educational Opportunity Grants (FSEOG), Federal Perkins Loans, and Federal Work-Study (FWS).

With colleges heading back this week, you should have your financial aid already lined up, but it’s the perfect time to start planning for next year.

Let’s go over the basics:

* Fill out the FAFSA as early as you can.  Financial aid is first-come, first-served so get your paperwork in early.  If you ‘re waiting on a few last 1099s, use your existing paperwork to file early, and file an amendment when everything finally arrives.  If you use a tax prefessionsal, they will often file the FAFSA for you for little to no additional charge.

* You need the FAFSA for all federal loans, such as Stafford, PLUS and Perkins loans.  Some scholarships also require the FAFSA.

*Always exhaust your federal options first, such as Perkins, Stafford and PLUS loans, before looking at alternative sources of funding such as private loans or home equity loans.   Federal student loan offer borrower incentives and protections that you will not find elsewhere.