This is the time of year when parents are stressing about paying for their child’s college tab. I’ve been hearing from parents who haven’t been able to borrow enough for college. I thought I’d share one of these emails.
A Mom’s Dilemma
Here is the mom’s note:
I would like to know what to do if you don’t qualify for a Parent PLUS loan?
Our second son is now in college, and we had quite a bit of money saved for their college (over $60,000, which is phenomenal for people with our early salaries), but I lost my job in 2009 and that put us into a financial pickle. We were able to pay for our oldest son’s first two years of college and our second son’s first year, but we are in the position now where we don’t have enough saved for his entire tuition and need to borrow – but we don’t qualify!
We earn about $150,000 per year, own our house and another house with NO MORTGAGE on it, and STILL cannot get a $9700 loan! We have tried EVERYWHERE. Any suggestions?
By the way – I wasn’t aware that we had any ‘issues’ on our credit. I just purchased a vehicle in March of this year after my car died and I got a 0% interest rate. How is it that you can borrow money to buy a vehicle but cannot borrow money for your child’s education? We are paying for him an apartment near campus and books out of pocket. We are just $9700 short.
A Borrowing Solution
Before I share a potential solution to this family’s problem, I want to explain what a Parent PLUS Loan is.
The PLUS Loan allows parents to borrow enough to meet the cost of a school’s attendance, which is determined by the college, that isn’t covered by their child’s financial aid package. There is no maximum borrowing limit. Considering how low inflation has been for years, the terms on the PLUS Loan are pricey. The interest rate is 7.9% and there is an additional 4% fee on the loan amount.
You can learn more about the PLUS by reading one of my previous posts:
How Parents Can Borrow for College
Since the mom and her husband didn’t qualify for a PLUS, their child can borrow more via a federal Stafford Loan. A freshman can borrow up to $9,500 via a Stafford of which no more than $3,500 can be a subsidized Stafford. A sophomore, junior or senior can borrow $12,500 a year of which $5,500 can be subsidized.
Student who borrow through a subsidized Stafford do not have to pay the interest that accrues while they are still in school (the federal government covers it) and the interest rate (at least for this year) is 3.4% versus 6.8%.
Stafford Loan Borrowing Limits
The regular borrowing limits are considerably lower for students whose parents who do qualify for the PLUS.
- Freshman: $5,500
- Sophomore: $6,500
- Junior: $7,500
- Senior: $7,500
Stafford Loan Limits When PLUS Loan isn’t Available
Students whose parents don’t qualify for a PLUS can borrow significantly more. Here are the yearly Stafford borrowing limits for these students:
- Freshman: $9,500
- Sophomores, Juniors, Seniors: $12,500
The family should be able to borrow what it needs through this program.
Bottom Line:
Families who have bad credit (at least in the eyes of the federal government) can take greater advantage of the Stafford, which is a better loan because of its lower interest rates and built-in consumer protections.
Lynn O’Shaughnessy is the author of The College Solution: A Guide for Everyone Looking for the Right School at the Right Price.
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Don’t people routinely use home equity loans/lines of credit to pay for college? I would think the interest rate would be lower than on a PLUS loan.
Hi KD,
Yes, home equity lines are certainly available to use for college. Not everybody has access to a home equity line. Many people don’t own a home and others have zero equity in their homes. In San Diego, for instance, more than a third of homes are underwater — the home is worth less than the mortgage.
Lynn O’Shaughnessy
Right now, home equity loans are cheaper than PLUS loans not that that helps a lot of people in today’s housing market. Also, most schools have some sort of payment plan, which would allow the family a couple of months to come up with the shortfall. I wonder what percentage of parents are actually turned down for PLUS loans?
The PLUS loan requirements are notoriously lax, at least in terms of the amount of debt which could be financed. It is a simple credit history check, no real underwriting. They are looking for “adverse history” in the past 6 months, and aren’t the best at doing it. It could be a screwup (it is the fed gov’t after all), particuarly if the mom received an auto loan at 0 percent recently. It may be worth at least considering some other private alternatives (private student loan, HELOC, payment plan, etc.), but those aren’t even mentioned here.
In the alterantive, where this is truly a “bad credit” scenario, why would a financial advisor be advising people with bad credit to take on more debt? Secondly, the article should have noted the Stafford Loan can only be taken out in the name of the student.
Finally, why, as a matter of policy, does the US government reward families with bad credit? As Lynn reports, the terms and conditions on a Stafford Loan are much better than those of PLUS loans, but you have to be rejected for the “pricey” PLUS loan in order to receive the increased Stafford Limits. That makes little sense.
HI Jerry,
Yes, there are other ways to finance college and my intent was only to mention the PLUS and Stafford option in this post. I do cover the borrowing issue more in-depth in my book, The College Solution and I have posts about other ways to borrow throughout my blog.
Parents need to be careful about how much they borrow through any means. And for many families a home equity line of credit will be a better way to go. Of course, many parents do not own a home or are residing in one that is “underwater.” In San Diego, for instance, this is a phenomenon for one out of every three home owners. The percentage is more than 50% for homeowners in such cities as Las Vegas, Detroit, Miami and Sacramento.
Lynn O’Shaughnessy
Great article, especially for this time of year.
Getting denied for the Parent Plus does not depend on the actual credit score of the parent.
They are actually only checking for 90+ delinquencies on the Credit Report.
From a recent article: http://www.custudentloans.org/2012/05/04/parent-plus-loan-and-private-student-loans-options-for-college-bill-payment/
“The Plus Loan credit review checks for adverse credit history. Adverse credit includes being delinquent 90 days or more on the repayment of any debt and if during the 5-year period before the date of the credit report there has been a default on debt, foreclosure, tax lien, repossession, wage garnishment, write-off of Title IV debt, or debt has been discharged in a bankruptcy. A lack of credit history or insufficient credit history is not considered adverse credit for the Plus loan program. Eligibility is not based on income and assets.”
So a person could have a relatively low credit score, but still get approved for the Plus Loan as long as they have no delinquencies in their credit report.
And to an earlier commentators point, home equity can offer low rates, but not everyone has access to home equity now, or their credit may be insufficient to access credit from their property at this time.
Private student loans are actually able to offer low rates similar to what is found in Home equity, but can use different cosigners to allow the student to get approved.
If a low rate is achieved, on a private loan, an aggressive repayment strategy is recommended to help pay the loan off as soon as possible, and mitigate the chance of future rate variability. Look for loan providers without a pre-payment penalty to help facilitate faster debt eliminations, like our program: http://www.custudentloans.org/
Borrowers with good credit can qualify for low rates on a private loan.
Thanks Ken for your sharing all that extra information.
Lynn O’Shaughnessy
Why would anyone mortgage their home to pay for tuition for a kid’s college? Kids can work or take out a student loan or take a break from college and save money, but to put your home on the line just to pay tuition seems very risky. I can’t imagine any of my boys even being okay with me, their mom, doing that. They were not raised with that sense of entitlement. For which I am grateful.
Hi Lynn, what if the extended amounts of the Stafford and Perkins Loan still don’t cover it? I don’t own a home and can’t qualify for Parent Plus and have been turned down as a cosigner.
Thank you in advance.
Ok, this is going to make me sound stupid but I’m a step parent and I kind of got thrust into this last minute. My daughter got Direct Sub and Unsub loans. Are these the Stafford and Perkins loans? Or are they an additional source we can apply for? Leaving us 18K short.
Hi CAvery,
The Direct Sub and Unsub loans are shorthand for the Subsidized Stafford Loan and the Unsubsidized Stafford Loan. The max that a freshman can borrow through the Stafford is $5,500.
Other alternatives are the Parent PLUS loan, which is a federal parent loan with a high interest rate, and there is home equity lines of credit and private loans. I you seek the latter, I’d try credit unions which typically have better terms. One source for credit union loans is CUStudentLoans.org.
If parents are turned down for the PLUS, the child can borrow more through the Stafford. Here is a link explaining that:
Here is one of my posts that explains this: http://www.thecollegesolution.com/when-youre-turned-down-for-a-college-loan/
Good luck!!
Lynn O’Shaughnessy