Posted: 12:43 p.m. Thursday, April 18, 2013
Yes, there’s a little-known loophole in the law. You might be able to reduce the payments to a percentage of your discretionary income. But first, a few facts on PLUS loans (Parent Loans for Undergraduate Students).
PLUS loans are available directly from the federal government to help you pay for your child’s education. You can borrow the entire cost of attendance, minus whatever student aid your child gets. You pay 7.9 percent interest, plus a 4 percent fee.
You have to pass a simple credit check. But the government pays no attention to the size of your income, how much debt you have already and how likely you are to be able to pay the money back. The colleges don’t check either – they just want you to come up with the money.
As a result, many parents – eager to help their children — borrow much more than they can afford. If you fall into arrears, you won’t be able to borrow more, to help your child stay in school or help the next child coming up. Your credit could be wrecked permanently.
Unpaid, a PLUS loan will follow you for the rest of your life, accumulating interest and penalties. You’ll probably be shocked to hear that the government can not only garnish wages for unpaid PLUS payments. It also garnishes Social Security and disability payments. (In mid-2012, the U.S. Treasury was garnishing roughly 115,000 Social Security accounts for up to 15 percent of the check, MarketWatch reports.) You can’t even get rid of the payments by filing for bankruptcy.
You can put off repaying for a while by applying for a temporary hardship forbearance plan. But the loan continues to build up interest due.
There’s a lower-payment strategy that most parents don’t know about, says Mark Kantrowitz, publisher of Finaid.org. It works if the size of the loan exceeds your income by maybe 40 or 50 percent, he says. Graduate students with PLUS loans can use this strategy, too.
The first step is to apply to the government to consolidate your PLUS loans into a single loan (if you have just one loan, it can be consolidated, too). You’ll have a choice of repayment plans. Choose income-contingent plan. Under this plan, you’ll pay no more than 20 percent of your discretionary income, and perhaps less. The loan can be forgiven after 25 years.
There are a lot of ins and outs to this plan You have to show hardship, and the loans you’re consolidating have to have entered repayment on or after July 1, 2006.
But for overborrowed parents, with modest incomes, it can be a lifesaver.