I’ll share with you our experience.
A few years ago, my husband was in the throws of putting his daughters through college. When the second one started college, we anticipated getting some additional financial aid, at least in the form of subsidized loans, as we would have two to pay for. Not so.
The older girl was in pharmacy school. Once she started her third year, she was considered a graduate student, so she didn’t count. As far as the (insulting term deleted) who review FAFSA forms was concerned, we only had one in school. So we were screwed. And as a graduate student, the older girl wasn’t eligible for the more heavily subsidized loans that had lower interest rates. Screwed again.
So, to finance the younger girl’s education, we relied on the parent plus loan. We obviously didn’t study the terms and conditions of that loan enough. I had paid for part of my own education with loans, and naively (ok, stupidly) assumed the terms for repayment were roughly the same as what I dealt with many years ago.
I’ll go beat my head against the wall now for not doing what everyone says: Read Everything Carefully Before You Sign It.
Fast-forward to six months after the younger girl graduated. Now it’s time to pay back those Parent Plus Loans. But wait—suddenly they’ve added thousands of dollars to the amount you need to repay. What gives?
The terms of the loan state that you do not have to start repaying the loans until six months after graduating. (In fairness, they say you are supposed to start repaying 60 days after the school makes the last disbursement, which would usually be in the middle of the last semester. But you can get a deferment until 6 months after the student graduates.)
However, they aren’t doing you any favors by offering the deferment option. The loans begin to accrue interest from the time you take them out. Upon the beginning of the repayment period, the accrued interest is capitalized and ADDED to the principal. Then you begin paying interest on the interest.
To make this clearer, imagine you borrow $10,000 a year for four years. At 7.9% interest, your capitalized interest will be almost $5000. The $40,000 loan has just become $45,000. Your monthly interest has just gone from $263 to $296.
When I explained this to my brother-in-law, his response was “F$#%.” Precisely. Put in slightly more polite terms, screwed again.
Add to this the outrageous interest rate. In a time when banks are barely paying 1% on savings accounts, the federal government is charging 7.9%? And this is supposed to be an affordable way to increase access to higher education? Please. Don’t insult me any more.
In addition, the parent plus repayment is very rigid. Most other student loan programs allow some flexibility in repayment. For example, suppose you take out eight loans through the Fed Loan program (one a semester for four years.) Under the terms of the Fed Loan, you can pay the minimum monthly payment on seven and pay extra on the eighth, to wipe it out faster. This is an efficient way to pay down debt quickly.
The parent plus loan spreads the payment evenly over all the loans, and there is no way to pay off one faster than the others. Screwed again.
Our president claimed to be helping by nationalizing the student loan program. All he’s done is made it impossible for parents to shop around for other loans, which might have better terms or lower interest rates. Screwed again.
The only reason to take out a Parent Plus Loan is if the issue is one of cash flow. For example, the tuition is due in August and you are short $4000. You know you will be able to put aside $1000 a month for tuition. Take out the loan, ignore what they say about not having to repay right away, and pay $1000 a month. That way you can pay it off by the end of the semester. Repeat every semester. (If you are smart, you’ll save the $1000 a month over the summers, so you can take out less—or none—in loans, and you don’t get caught in the last semester by the 60 after the last disbursement business.) By the time your son or daughter graduates, you will have no obligation to the scam that is the Parent Plus Loan.
Do yourself a favor: flee from the Parent Plus Loan.