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Dear Liz: My husband and I took out more than $200,000 in federal parent PLUS loans to pay for our two daughters’ college educations. My husband earned over $300,000 when the loans were made. Since then, he lost his job and now makes $100,000. I went back to work and earn $35,000. We finally succeeded in getting a more affordable mortgage, but we are taking about $3,000 out of our savings each month to pay the bills.

My husband handles the finances and says that even if we could lower our loan payments, it wouldn’t matter because we still have to pay forever. He can’t even think about retiring. We do have a financial advisor, but I’m very concerned and wonder whether we should be using our savings this way. What are our options?

(P.S. Our girls both graduated, although one doesn’t have a great job and the other is still looking for work.)

Answer: Parent PLUS loans can, in moderation, help families pay for their children’s college educations. The key phrase there is “in moderation.” Even at your former income level, taking on so much debt for your children’s educations was ill-advised.

You don’t have a lot of options, unfortunately. As you probably know, this debt typically can’t be erased in Bankruptcy Court. If you stop paying, the government can take your federal and state tax refunds, garnish up to 15% of any Social Security benefit payments and ruin your credit, said Mark Kantrowitz, publisher of the FinAid and Fastweb financial aid sites.

“The government can also sue defaulted borrowers to recover the debt if they believe the borrower has sufficient funds to repay,” Kantrowitz said.

Ideally, you wouldn’t have borrowed more than you could have paid off before retirement (while still being able to contribute to your retirement savings). Since that’s not the case, your best strategy may be to simply get the payments as low as you can and resign yourself to paying this bill, perhaps until you die. (PLUS loans are canceled when the borrower dies and are not charged against the borrower’s estate, Kantrowitz said.)

As you suspect, it’s not a good idea to dip into savings to pay your monthly bills, especially when you’re doing so in the vague hope that things will get better rather than in the face of concrete evidence that they will.

There are several ways of stretching out the term of the loan to reduce your payments. One is using all available deferments and forbearances to suspend repayment for a few years. Then you could use an extended repayment plan to stretch out the loan term to 30 years.

Normally you wouldn’t want to take deferments and forbearances because interest continues to accrue, digging you into a deeper hole, Kantrowitz said. “But if the goal is to reduce the burden of the monthly payments and not ever fully repay the debt, it can be a workable strategy,” he said.

Another possible option for some families is an income-contingent repayment plan. Parent PLUS loans aren’t eligible for the more favorable income-based repayment plan, but income-contingent plans could lower your payments to 20% of your discretionary income, with the balance of the loans forgiven after 25 years of repayment. Discretionary income in this case is the amount of your income over the poverty line.

To qualify, you’d need to consolidate your Parental PLUS loans into a Direct Loan consolidation loan. You can find out more at http://www.loanconsolidation.ed.gov. Given your current income, though, you may be better off with the extended repayment plan.

 

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7 Comments

1

My question is if the gentleman was making $300,000 per year, why didn’t they save up a good chunk of that money in advance? (Even Ivy League schools don’t cost much more than $150,000 for four years, so we can assume that the $200,000 was all or most of the daughters’ education fees, unless we’re talking some form of graduate or professional school.)

Yes, I realize this doesn’t help this particular couple much at this point, but it’s good for anyone whose kids are still in HS.

2

I hope the two daughters are not okay with this financial burden their parents are carrying and will, at some point, step up and address the issue.

3

Well, you’d hope so, wouldn’t you? But the daughters likely will be stepping up one way or the other, because SOMEONE’s going to need to support these parents in their old age.

4

Exactly, DRF. Actually, given the cost of college education they need to start thinking of it before the kids are even born. Judging by last week’s column–where the writer thought a $185,000 income made her family “middle income”–there are some high earners who don’t have a good fix on how little financial aid they’re going to get.

5

Why is it the daughters’ fault that the parents were irresponsible with their money (and likely still are, since it sounds like they haven’t fully downgraded their lifestyle to account for their lower income)? I don’t understand why people are so quick to heap scorn on the children in cases like this.

6

It amazes me that so many people get to college time for their kids, and they never started the college fund! I know from personal experience that when the kids are babies, the college years seem so far in the future that it’s hard to get motivated to start saving. However, those years between 0 and 18 fly by so fast. It’s no wonder so many kids are burdened with student loans as soon as they graduate. When I had student loans, you didn’t start paying interest until you started repaying the loan — after graduation. Now the interest starts to accumulate as soon as the loan check is cashed, making the debt burden even bigger post graduation. This is a sad state of affairs for this family. I hope they find a way to get through it intact.

7

Its amazing how much debt we can chalk up after our kids goes to study, preparation is important. Starts saving early in the child’s life.