The Federal Parent PLUS loan has no cumulative loan limit and the annual limits are equal to the full cost of attendance, minus other aid received. Parents can also cosign private student loans, which may have very high annual and cumulative loan limits. Loan balances may increase through interest capitalization if the parent defers repayment while the student is in school. It is very easy for a parent to get overextended when borrowing to help his or her children pay for school.
Based on data from the 2011-2012 National Postsecondary Student Aid Study (NPSAS), cumulative Federal Parent PLUS loan debt at graduation for dependent undergraduate students corresponds to an average monthly payment obligation of 6.6% of the parent’s adjusted gross income (AGI), assuming a 10-year repayment term. That may sound reasonable, but about 10% of Federal Parent PLUS loan borrowers earn less than $25,000 a year. These parents will have annual loan payments equal to about a quarter of the parent’s annual income, clearly unaffordable. (Note that these figures are for just one student and do not consider past, present or future Federal Parent PLUS loan debt for the student’s siblings, nor do they consider repayment obligations associated with cosigning private student loans.)
Just as there are practical limits on reasonable and affordable debt for students, there are good rules of thumb concerning how much parents should borrow.
- Parents should borrow no more for all their children than they can afford to repay in 10 years or by the time they retire, whichever will occur first. After the parents retire, there is no new income coming in, just assets. When the parents retire, they should pay off all their debts because they will be potentially paying higher interest on their loans than they are earning from their savings. (On the other hand, if the parents would not have enough income to live on if they paid off all debts, and then they can reduce the burden of the monthly loan payments by extending the repayment term. Federal Parent PLUS loans are discharged if the borrower dies, so any leftover debt will not be charged against the parent’s estate.)
- Total Federal Parent PLUS loan debt for all their children should be less than the parents’ annual income, and ideally a lot less. If total parent loan debt is less than annual income, the parents will be able to repay the parent loans in ten years or less. If the parent expects to retire sooner than ten years, they should reduce the reasonable debt limit proportionately. For example, if the parents expect to retire in 5 years instead of 10, they should have total Federal Parent PLUS loan debt that is no more than half of the parents’ annual income.
- Parents who have very low income should not borrow to help their children pay for school. If the parents’ income is less than 150% of the poverty line, the parents should not borrow from the Federal Parent PLUS loan program or cosign private student loans.