NEW YORK (MainStreet)The government is providing assistance for student debtors in creating default avoidance plans for them. But what about the parents who borrowed money through the PLUS program? What options have they?
Not many it seems.
"How come no one ever writes an article about the parents part - the parent PLUS loans?" MainStreet reader Pat Burkholder of Pennsylvania wrote us after reading an article on here called "What Happened to the $1 Trillion of Student Debt?"
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"I'm 54 and have payments of $571 per month for 30 years," Burkholder explained. "Then the student gets out of school without a job then the parents get stuck and can't make the payments either. I've never heard of help for us."
He wanted to know how can parents avoid default since these repayment modification programs like Income Based Repayment (IBR) or Pay As You Earn (PAYE) are not available to parents. He does not believe that the tuition loan programs take current financial obligations into consideration. He is quite correct. As pointed it out in the article "Loans Organized Quite Might Envy," debt-to-income ratios are not considered. Indeed, underwriting of student loans has been historically lax.
"So if you make a decent income but have three kids, a mortgage, etc., you are still in trouble," Burkholder added. "I just wish I understood all this five years ago or could have read an article about this. I might not of made the decision to send [my daughter] to college."
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Unfortunately, he is not a lone voice. According to Claire Law, a certified educational planner and owner of Educational Avenues, Charleston, S.C. and co-author of the book Find The Perfect College for You (Supercollege, 2012), the issue of parents' loans is an aspect of the student loan bubble that is deemphasized.
"PLUS loans for parents are not considered student debt," Law explained. "The same is true about other debt that parents may have taken on, like refinancing their home, or selling it to pay for college or taking business loans to pay for college."
She clarified that Income Based Repayment plans (IBR) and Pay-As-You-Earn (PAYE) are new plans for repaying Stafford loans for students and PLUS loans signed for by students. These new plans are designed to stop new loans from getting out of control and getting into negative amortization.
"There are people who borrowed mega-loans in the last decade or two, and are still paying it, even after they've paid for the principal three times over," she said.
Law said that not everyone is able to hire an education planner who can project what the cost will be for four years, factor in the other children in the family who need to go to college and then look at the family's ability to sustain that total debt. Because these loans are not dischargeable even in bankruptcy, they follow the borrower for life.
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"Yes, IBR would be nice for PLUS, and private loans too, and even nicer if they stopped the fees upon fees because borrowers end up paying double and triple what they initially borrowed," she noted. "People might be surprised to find out that some financial planners are now consolidating PLUS loans and extending the repayment period as long as possible when the parent borrower is already "old," meaning they are facing retirement."
Law feels such repayment options for parents would benefit society and the economy.
But Richard Vedder, a professor of economics at Ohio University who specializes in education has a very different view. He does not feel it would be a benefit the economy at large if the older borrowers of PLUS loans be given the same forgiveness provisions as student borrowers. Instead of helping to settle their debt and subsequently buying a house, car, etc. and stimulating the economy, it is just shifting money around.
"You are just robbing Peter to pay Paul," Vedder said.
Financial aid expert Mark Kantrowitz falls somewhere in between the two. He thinks there should be some mechanisms available for parents. He would support extending IBR and PAYE plans to Parent PLUS loans making them eligible for these options - with one caveat: "If safeguards are added to prevent the moral hazard of intentional overborrowing such as the addition of aggregate loan limits based on debt-to-income or debt-service-to-income ratios for new borrowers."
But Kantrowitz says that parents may already have a little bit of an out. It seems that those who entered into repayment on all of their Parent PLUS loans can, since July 1, 2006, consolidate the loans into the direct loan program and obtain something called income-contingent repayment (ICR).
"This was a predecessor of IBR and PAYE," he explained. "ICR is available only on a consolidated PLUS loan and only if it entered repayment recently. It is not available on the unconsolidated loans."
What about the parents who refinanced homes for their kids' tuition? Do they have any repayment options? Are they stuck not only paying for their kids' tuition but also for those who benefit from the ICRs, IBRs and PAYEs.
It seems that they are "SOL".
"Nobody tracks the use of home equity loans to pay for college," said Kantrowitz. "It is a relatively small percentage, on the order of a few percent. I'd estimate that there are several million borrowers who owe on parent PLUS loans. Most are capable of repaying their loans, since Parent PLUS loans have the lowest default rate of the various federal education loans."
Maybe they are capable, but they must wonder why should they be footing the bill for themselves and others who borrowed too much. It seems the middle class gets it from both ends even in the college tuition bubble.
Kantrowitz did mention one demographic that is relatively unaffected by all of this.
"Very few members of Congress have borrowed from the Parent PLUS loan program, and even fewer struggle to repay those loans," he said.
--Written by Michael P. Tremoglie for MainStreet