College Education Costs & Family Debt Pressure
Helping your child get a college education feels profound. It is a path full with hope. Pride in their success comes along too. Big money thoughts are part of this trip. College is not cheap, everyone knows.
Today raising one child might cost over $233,610. That huge amount does not even count college expense. When you add higher education costs rise so much. Average public school tuition hit $10,423 recently. Four years adds greatly to this figure. Loan interest adds another $50,000 easily. That is on top raising your child costs.
Many families must face this reality. Maybe your recent grad has lots student debt. Or perhaps you paid by taking a parent loan. Those loan statements remind you always. The financial promise made stays clear.
Good news is discussing managing student debt grows. Parents helping is more talked about now. There are absolutely no rules preventing you. Help your son or daughter pay debt off. Wanting to check options helps your child much. This makes their post-college life better.
Rules & Traits of Parent PLUS Loans
Parent PLUS loans are a main way parents carry college money. The federal Direct Loan Program offers these. Parents of dependent undergrads can borrow. It covers costs financial aid does not. You borrow up to full attendance cost. Other aid gets subtracted first. No total limit exists on PLUS loans.
PLUS loans once seemed for richer families. But college costs keep climbing non-stop. These loans become the last choice for many. Lower-income families use them alot. They fill the funding gap left. This is after student hits their own loan limit. That limit is only $7,500 yearly for dependents.
PLUS loans have certain key traits. They differ from undergrad federal loans greatly. The interest rate for PLUS loans is 9.08%. This is often higher than undergrad loans. PLUS loan interest is not subsidized ever. Interest starts adding right after funds disperse.
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Strategies & Considerations for Helping Repay Loans
This accumulating interest can add lots. You can defer repayment sometimes. This is while student is in school. Plus for six months after graduating is an option. But interest keeps adding during deferment period. Accrued interest gets added to principal balance. This happens when loan enters repayment later. Direct PLUS loans also charge fees for lending. Fees get taken from each disbursement. This lowers amount of usable funds received.
Repayment for Parent PLUS loan starts fast. Just 60 days after full disbursement happens. Grad PLUS loans can defer while in school. No automatic grace period like Stafford Loan has. Parent PLUS for undergrads *can* defer repayment. This is while student enrolls half-time at least. Plus the six-month period after they leave school.
Eligibility needs parent’s credit look. Their relationship to the student matters so much. A modest credit check is needed. It checks for an adverse credit history mainly. This means 90+ days late on debt. Or Title IV debt within past five years is bad. Defaults, bankruptcy, and foreclosure count here.
Denial rules and student aid are specific. If parents denied PLUS loan student may get more Stafford. Or if college aid person thinks parents denied. Student gets eligible for increased unsubsidized limits. These higher limits same as for independent students. Provides another funding path for student aid. Only one parent need be denied for student gets this.
Loan Management & Debt Optimization Ways
Talking school aid office first feels smart. Do this if you think PLUS denial might happen ever. Or if unusual stuff stops you using program. Talk *before* applying for the PLUS loan okay? Getting PLUS approved unexpectedly complicates matters alot now. This makes student getting that extra Stafford aid much harder later.
If student got more Stafford and parent later approved a PLUS loan. Student won’t get further disbursements from the Stafford increase. They keep amounts already disbursed though okay? Future Stafford aid goes back to lower standard limits then. It does not count excess amounts student got earlier.
Annual cap on Parent PLUS includes Stafford aid money. Total borrowing cannot exceed cost-of-attendance minus other aid received. Apply for PLUS, you need the FAFSA completed. And sign a master promissory note also needed here. To qualify student must be enrolled half-time minimum. They must also be eligible for federal student aid.
Citizenship rules apply for both borrower and student. Both must be US citizens or eligible noncitizens okay. Neither can have federal government judgment lien on property. Parent can’t owe overpayment on federal grant debt. Or be in default on previous federal loan debt either. Unless satisfactory repayment arrangements made okay. Student must register with Selective Service requirements.
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Colleges check eligibility for both dependent student and parent carefully. They must check student and parent before certifying PLUS loan okay. Need to see student’s full financial aid history details okay. School might ask parent for extra forms too. Signing a statement educational purpose is an example sometimes.
Family structure really changes who can borrow through PLUS programs. If parents are divorced both parents may borrow from PLUS. Custodial and noncustodial parent can apply separately here. Their combined borrowing stays under the cost minus aid cap total. Stepparent married to custodial parent can borrow sometimes also. Their income counts for student’s expected contribution part okay.
Stepparent with non-custodial parent isn’t eligible never for PLUS. Legal guardians cannot use PLUS program rules. Aunts, uncles, and grandparents also cannot borrow using PLUS.
Strategic borrowing approach feels crucial. A key advice piece is simple. Families should use student’s Direct loan eligibility first please. Do this *before* turning to Parent PLUS loans. Why? Direct loans have lower interest rate you see.
Unsubsidized Direct loans available without need showing. Much like Parent PLUS loan they work okay. You don’t need show hardship for it. Many families don’t use full Stafford limits sadly enough.
Nothing stops parents helping with Stafford loan payments. By using lower-interest Stafford loan first initially. Families can save lots money over loan life. Compared to borrowing through higher-interest PLUS this helps greatly. It is a smart money move starting right when you borrow.
New federal education loans are Direct Loan program now. To get Parent PLUS loan, contact college aid office first. The parent borrower signs a Master Promissory Note they need. This covers a period continuous enrollment usually occurs. Annual borrowing capped at cost of attendance okay. Minus other aid student receives always sets this limit.
College manages the disbursement process here too. Funds drawn from Common Origination Disbursement system always. Deposited into student’s account afterwards happens there. Tuition and fees get covered first right. With family okay, room and board too pays up. Any leftover money goes to student for their expenses needed. This pays for textbooks and such things college requires.
Parents thinking PLUS loan might consider other money sources. Like a home equity loan or private ‘alternative’ loans perhaps explore. Each option has pros and cons unique to it alone. Interest rates and repayment terms differ much too. Careful comparison is key before deciding something major.
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College years finish and child starts career. You want help them manage student loan debt too. This is a strong understandable temptation always. It is a generous impulse from love parents have. Think about giving money to lenders sometime soon. It is vital know potential money effects first always. Primarily regarding federal gift tax this matters most of all.
As of 2023 gifting over $17,000 per year happens. To help with student loans means you could owe federal gift tax then perhaps. This tax applies to the *giver*, you the parent person. Not the recipient your child pays this tax.
Rules let you gift another $17,000 to child’s spouse. If they are married this applies okay then. Cannot just give married couple over $34,000 total without potential tax issues. For most current info on gift tax exclusions visit IRS website best advice always okay.
There is silver lining for paying education directly. If child still enrolled in college is true. Consider financial plan better for you both maybe. Instead taking loans then paying later on. You can make unlimited tax-free gifts of expenses. This is *as long as paid directly to institution*.
Paying tuition bills straight avoids gift tax issue overall.
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Another strategy avoids gift tax later for college. Setting up a 529 College Savings Plan works well. These savings vehicles offer tax advantages clear. It is good option for managing educational funding. Without bumping into gift tax limits if done right. Contributions follow plan rules and federal guidelines correctly.
Several practical strategies manage student debt. This works whether loan is child’s or parent PLUS. These aren’t complex financial moves honestly. Just straightforward actions making a difference now.
Setting up automatic payments easiest way. It ensures loans paid consistently always. Life gets busy very fast now. Things slip through cracks sometimes here okay. Missing loan payments brings late fees. Also negative marks on credit reports likely.
Especially if loan is in your name too. Automating payments removes this risk. Peace of mind you get greatly.
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Remembering those tax rules is crucial. Already mentioned this subject. If providing lots help you might pay gift tax. File gift tax return if gifts exceed exclusion. This is $17,000 for 2023 gift year limit okay. Key exception is original co-signer help. Gift tax generally doesn’t apply there. Double check current IRS rules first though.
Smart financial move focus highest interest first always. Principle applies to all debt you have now. Look at all your outstanding loans now carefully. Car loans, mortgage, credit card debt included okay. Student loans are on list too you see.
If carrying credit card debt at 18% rate. While student loan interest is just 8% rate. Financial sense says pay higher-rate credit card first off. Within student loans private ones higher rates normally so. Focus extra payments there often wise plan indeed.
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Add even small extra amounts helps. Like $50 or $100 per paycheck perhaps. To those higher-rate loans makes a difference. Reduces total interest paid significantly over time. Shortens repayment term long run maybe. Making your money work efficiently happens here.
Effective tactic is prepaying the loan early. Particularly if federal loan doesn’t accrue interest okay. This happens while student is still in school period. It allows paying down principal directly. Before interest starts accumulating on it all. Substantially reduces future interest charges. Total amount repaid lowers too now.
If financial windfall happens unexpectedly though. Like bonus at work or tax return comes back. Allocating those extra funds directly toward principal amount. Of student loan debt is powerful way for sure. Accelerates payoff and saves on interest greatly here.
Free up funds for prepayments too. Rearranging your existing finances helps with this. For example multiple credit cards balances. Consolidate them single loan with fixed rate lower. Lower than credit card APR saves money. This money can be directed towards student loans okay.
Setting up biweekly payments is clever idea. Pays down debt faster without feeling pinch much. Calendar structure means 52 weeks don’t divide evenly so. Four weeks per month means 12 months total usually. Paying half monthly payment every two weeks helps. Ends up making 26 half-payments yearly. This equals 13 full monthly payments total amounts.
Standard is just 12 payments annually you know. That one extra monthly payment goes straight to principal balance. This accelerates payoff timeline significantly fast okay. Simple yet effective strategy works well always. Any loan type benefits from this method greatly. Not just student loans see what I mean.
Matching child’s student loan payments too. Excellent way provide support and instill habits. Means you pay exact same time child does perhaps. Doubling the impact happens then. Or alternate payments each paying every two weeks. Scheduling payments every two weeks can help. Significantly reduce total interest paid over loan life okay. Similar to biweekly method by borrower or helper.
Finally understand your offer is paramount goal. Deciding pay child’s student loans generously. Partially or in full is truly generous act. Provide your new grad crucial head start working. Free up their funds for other expenses maybe. Or unexpected life events occur later. This offer impacts your own financial place though. Essential carefully consider pros and cons always.
Think about closeness to retirement status please. Allocating big funds to child’s debt might jeopardize your savings okay. Like your 401k or other retirement funds getting risked. Be fully aware balances and interest rates on *your* debts also. Informed decision after reviewing picture ensures help works well. Help is sustainable and creates no undue hardship for you ever.
Regardless making payments on child’s loan or not doing anything. Explore options like student loan refinancing happens maybe. Or refinance your own parent loan too helps. This helps simplify payments possibly for sure. Secure more affordable interest rate maybe gets done. Gain more flexible terms potentially okay helps much. Reducing overall burden for the borrower is main goal you see.
Managing student loan debt feels like a maze sometimes. It is hard for students or parents with Parent PLUS loans. Initial repayment plans are just a start you know. Setting up automatic payments is a basic approach. Focusing on high-interest debt does provide a foundation. Yet complex financial situations ask for better tools. Refinancing might be a path to less burden. Consolidation offers altered repayment terms perhaps. Federal forgiveness programs could cancel debt in some cases. Understanding options is very important for those parents. Parent PLUS loans have unique rules actually. Eligibility criteria is different too within federal rules.
One big way parents can tackle a Parent PLUS loan is transferring it. The child can take responsibility, yes. This isn’t a federal program thing. It happens through refinancing the loan with someone private. The new loan ends up only in the child’s name. Refinancing looks good with a lower interest rate. A shorter loan term also appears attractive you see. That could save lots of money over the loan’s life. Refinancing $130,000 loan from 7% to 5% works well. A 10-year period could cut your monthly payments. Significant interest savings might result for you. Still, knowing trade-offs are vital always. Refinancing federal loans means losing benefits.
Federal loan benefits includes income-driven plans. Various deferment options are gone also. Forbearance options are also lost. PSLF is one federal forgiveness program you give up. Private loans does not offer these protections usually. They lack relief options for the most part. Eligibility for federal plans depend on borrower’s situation often. For Parent PLUS loans, parent is the borrower always. Student does not borrow this money you see. Parent may not qualify for PSLF or income-driven plans. That is based on their job or how much income. Losing access by refinancing then isn’t a major issue. But if parent *could* get these programs, refinancing stops that. Carefully evaluate parent’s eligibility always. Weigh federal benefits versus private rate savings first. Private lenders need a minimum credit score, they do. Favorable debt-to-income ratio helps you get approved.
Beyond giving Parent PLUS loans away, refinancing helps private loans. Parents might be a co-signer on those too you know. If a parent co-signed a private loan for their kid, kid can refinance it. That puts the new loan solely in the child’s name finally. This releases the parent from legal responsibility always. Child might not qualify for a refinance alone right now. Or new loan terms aren’t good for them. Many private lenders have a co-signer release choice then. You do not need a full refinance for this release. Requirements for co-signer release are different by lender, however. Commonly student shows steady income history. Passing a credit check is part of it too. Making certain number of on-time payments matters a lot. That often is 12 or more payments, full ones. Avoiding deferment for a period helps. Sallie Mae wants a year free of deferment before release applying.
If child finds eligibility hard for refinancing solo. But the goal is still helping the parent later. Or getting better terms for the loan perhaps. An intermediate step is refinancing with co-signer sometimes. Maybe a different family member can co-sign now. That is if appropriate and they are willing. Choose lender offering clear co-signer release plan programs. This lets the child build payment history now. They work towards meeting solo requirements later. Co-signer release or future refinance is the aim. Understand specific terms very carefully. The requirements of any co-signer release program matter. Check what potential lender offers before going forward.
Federal student loan consolidation is a mighty tool. This works well for Parent PLUS loans indeed. It functions unlike refinancing quite a bit. Consolidation puts multiple federal loans into one. It becomes single Direct Consolidation Loan at once. One monthly payment results from this you know. You get one loan servicer as well which is nice. Interest rate is weighted average of old loan rates usually. It rounds up to nearest one-eighth of a percentage point slightly. Consolidating PLUS loans might cut interest rate by 0.25%. Consolidating PLUS loans separately can get this benefit most. Other federal loans are Stafford or Perkins loans. Be careful about losing loan discounts you had. Considering the impact on discounts is important too.
Parent PLUS borrowers often need consolidation for things. It is necessary step to get IDR plans really. Public Service Loan Forgiveness is also accessed this way. Parent PLUS loans don’t directly qualify for most IDR plans. Those plans are designed for students not parents. By consolidating, borrower becomes eligible for ICR. Income-Contingent Repayment (ICR) plan is the one option. This is only IDR plan standard Direct Consolidation Loan gets. That’s when loan starts from a Parent PLUS loan history.
Under Income-Contingent Repayment plan, payments are capped. The cap is 20% of borrower’s discretionary income, that is it. Discretionary income is calculated using AGI. It is difference between borrower’s AGI and poverty guideline percentages. Family size and state affect this calculation for you. While ICR might lower some payments for some. It is often considered more expensive IDR plan maybe. Other options for students exist that are less costly. If borrower pays consistently under ICR for 25 years. Any remaining balance on the loan gets forgiven then. But the forgiven amount may get taxed by IRS later. That happens at that future time frame, they say.
Public Service Loan Forgiveness (PSLF) is faster path to forgiveness. This is for eligible Parent PLUS borrowers only. If parent who got the PLUS loan works full-time. That is for a qualifying employer too. Government work counts at any level you know. A 501(c)(3) non-profit also qualifies you see. They might be eligible for the PSLF program. Loan must first consolidate into a Direct Consolidation Loan. Borrower must enroll in the ICR plan after that too. Making 120 qualifying monthly payments is needed then. That is while working for your qualifying employer. The remaining balance on the loan gets forgiven. This forgiveness is not taxed by the government either. Remember parent’s job matters for PSLF eligibility. Not the child’s work history you should know.
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