The Minuses of PLUS Loans: Advising Parents on College Borrowing Decisions

Abstract

While student loans continue to be a hot topic from economic, political, and social perspectives, and recent research has focused on the individual outcomes and macroeconomic effects of student borrowers, this paper focuses on a different group of borrowers – parent borrowers, specifically parent PLUS loan borrowers. After providing a primer and exploring recent trends related to this type of education debt, this paper will focus on what advisors need to be aware of when working with parents, regardless of financial status, who wish to borrow to pay for higher education costs. Four major takeaways from the paper are as follows:

• Information related to the costs associated with borrowing parent PLUS loans is not presented in a transparent way; therefore, it is difficult for parents to accurately evaluate and compare federal and private student loan options.

• Given that there is no uniformity in how financial aid award letters are presented, parent PLUS loans may be communicated in a misleading way; therefore, advisors should be involved in reviewing financial aid award letters with clients to help them make optimal education funding decisions.

• The low barriers to borrow parent PLUS loans may enable or encourage less affluent parents to borrow more than they can afford to repay; therefore, advisors should consider working with these types of individuals to reduce instances of overborrowing.

• The limited access to popular income-driven repayment plans for parent PLUS loan borrowers makes this type of financing less attractive than other federal loan options that are available to student borrowers. As a result, parents may be better off pursuing private education loan alternatives, especially given the current low interest rate environment.

Keywords: student loans, student debt, PLUS loans, parent borrowers, college planning

JEL Classification: D14, I22, I28