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College Loans for Parents: A Cautionary Tale

Spring is the time of year when many parents turn to the least enjoyable part of the process of sending children off to college: taking out loans. If you want to contribute to your child’s education by taking out a government loan, the Pittsburgh Post-Gazette has a few words of warning:

 Borrowing programs designed to help parents raise money for their children’s education—such as PLUS loans—could potentially hurt the families they are intended to help. The loans are remarkably easy to get, yet nearly impossible to get out from under when families bite off more debt than they can chew.

Unlike federal student loans, PLUS loans—which also are provided by the federal government—have no limit on borrowing. Parents can borrow as much as they need to cover their child’s education up to the full cost.

In order to qualify for a PLUS loan, parents need only have a fairly clean credit history. Lenders make no attempt to assess the income or employment status of their borrowers when determining how much to lend. This makes it much easier for parents to get in over their heads, and there is little recourse once they do: Much like regular student loans, these cannot be discharged in bankruptcy.

The good news, for parents at least, is that students are starting to foot more of the college bills themselves. A recent study by Sallie Mae found that students now pay 30 percent of college costs, while parents pay 37 percent; four years ago, those numbers were at 24 percent and 45 percent respectively. And students are beginning to contribute through their own savings and income, paying an average of $2,555 last year (as compared to $1,944 in 2009).

As you arrange your financial plan for the next four years, make sure it doesn’t chain you to a never-ending cycle of debt.

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  • Anthony

    There’s No Shortage of STEM Graduates (report by Economic Policy Institute). A cautionary bit of advise to investing parents identifying degree programs with projected payoff.

  • Daniel Nylen

    “A fool and his/her money are soon parted” ; “the stupid shall be punished”; “caveat emptor” and on and on to the tune of over $1 trillion.

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