Older Americans have more student loan debt than ever, but in many cases it’s not because of their own higher education costs. The number of Americans aged 60 and older with student loan debt quadrupled from 700,000 to 2.8 million between 2005 and 2015, according to a report from the Consumer Financial Protection Bureau, with most of the loans benefitting children and grandchildren.
Parent PLUS loans are appealing because they can help consumers—particularly low-income families—cover aid gaps. But Parent PLUS loans or cosigning a private loan should be last resort sources of financing for your kid’s education. While colleges may make them look appealing they can wreak havoc on your finances as you near retirement.
“Critics argue that in some cases, schools may be purposely downplaying the risks by packaging financial aid award letters in such a way that the Parent PLUS loans look more like gift aid than actual debt,” notes U.S. News & World Report. Interest rates are high, and taking on tens of thousands in debt later in life is sure to provide parents with unexpected financial headaches. According to the CFPB’s report, “nearly 40 percent of federal student loan borrowers age 65 and older are in default.”
One obvious alternative: Choose a cheaper school. We covered other options a bit here. Beyond that, though, you can consider the following strategies.
Make Sure Your Kid Maximizes Their Loan Options First
You likely don’t want your kid saddled with a bunch of debt, but particularly for federal loans, students have more options and better protections than their parents do. For example, “while schools may be penalized by the Department of Education if too many of their undergraduates default on student loans, they aren’t held to the same standards when parents fail to repay student debt,” reports U.S. News. “That gives the schools extra incentive to pad award letters with high-interest parental loans.” While the amount students can borrow is limited each year, parents could theoretically borrow the full cost of attending, and parents don’t qualify for most of the income-based repayment plans that their kids do.
This could also work after graduation: Rather than having loans in your name, you could offer to help them repay theirs after they start working. I can’t think of a more generous graduation gift than that.
Take Advantage of 529 Plans
This option obviously requires some planning, but opening and funding a 529 is a much better financial move than taking out loans to pay for higher education. You can read more about them here and here.
A similar option is a Coverdell account, which is like a 529 except the contributions are tax deferred, making it essentially a trust. While your tax bill will be higher, your kid will have more freedom to use the funds how they want once they reach a predetermined age.
Consider Private Loans First
Though it may seem counterintuitive, Parent PLUS loans can have much higher interest rates than some private loans: U.S. News reports PLUS loans have interest rates of seven percent, compared to 4.5 percent for students, and origination fees of 4.3 percent. So shop around. (On the other hand, students have many more protections with federal loans than private loans, and should exacerbate those options before shopping with private lenders.)
One thing to note: Parent PLUS loans will be discharged in the case of death or disability, or qualify for an income-contingent repayment plan, which isn’t true of private loans.
Another option: Some states, like Massachusetts, also offer loans to residents.
Use Your Roth IRA Funds
If you didn’t set up a 529, a Roth IRA can be a fine alternative source of funding. Roths have a lot of positive attributes, one being that there’s no early withdrawal fee levied if the money is used for educational expenses, like tuition or room and board.
Refinance Parent PLUS Loans in Your Kid’s Name
If you took out a PLUS loan but are having trouble with the repayment, you may be able to refinance it in your kid’s name. The Department of Education technically does not allow you to transfer your debt, but if you refinance you could get around this.
To do so, your child will need to apply for the new loan. “Even though the current loan is in the parent’s name, the child must fill out the application with his or her information including income, school, and degree,” Phil DeGisi, Chief Marketing Officer at CommonBond, told Student Loan Hero. Then you’ll need to find a lender who will service it.
It’s not the best option, but it could be an avenue if you’re really having difficulty repaying the loan and your child is comfortably employed.