Black parents can avoid the debt trap of Parent PLUS loans

Malik Lee is a certified financial planner in Georgia and the managing principal at Felton & Peel Wealth Management. He recalls being accepted into Morehouse College, in 1999, and having to pay around $20,000 a year for college.

Lee’s legal guardian, his grandmother, refused to take out a loan for his education.

Although her response might seem harsh to some, Lee, a professional in the financial world, describes it as being one of the most important decisions that she has ever made.

Lee says that many parents have struggled with repaying the loans they took out for their children’s education. Some children cover the payments of the loans because their parents are no longer able to afford it.

Lee can imagine his 90-year-old grandmother still repaying a student loan to pay for his education, when her retirement is what she should prioritize. He says that her saying “no”, was a remarkable decision.

Parents of college-bound dependents can apply for federal parent PLUS loans to help pay education costs not covered by any other federal aid.

These loans are different from the federal student loans that students borrow in that they have a higher repayment rate:

• Interest rates are higher. Parent PLUS loans have an interest rate of 8%, while federal student loans only charge 5.5%.

• No grace period. The grace period for federal student loans is six months before repayment begins. Parent PLUS loan repayment begins once the loan has been fully repaid.

• There are fewer repayment options. Parent PLUS Loans do not qualify for government programs that offer more generous repayment plans, such as Revised Pay As You Learn, Pay As You Learn and Income Based Repayment. After consolidating their Direct Loans, parents can request Income-Contingent repayment.

The combination of tougher terms for student loans compared to federal loans and the disparity in wealth and wage between Black and white families has a negative impact on the growth of many of the poorest borrowers, says a brief released by Education Trust, an advocacy and research group in higher education based out of Washington, D.C.

According to the Bureau of Labor Statistics, Blacks earn on average 22% less per week than their white counterparts. According to the January 2023 Treasury Department report, Black families are also less likely than white households to have financial investments. The same report concluded that Black families with assets who invest have a significantly lower value than white families.

Brittani William, Senior Policy Analyst in Higher Education for Education Trust, said that black borrowers were using their retirement funds to pay back parent PLUS loans. This is a major problem for black borrowers, as it limits their capacity to plan and save for the future.

There are many ways you can support your child without putting them in debt.

Learn as much as you can about funding and financial aid options to avoid overextending yourself.

Jackie Cummings Koski is a certified financial planner from Ohio and teaches financial education. She says, “Introduce yourself to the financial aid application process just as much as the college selection.” Koski said that financial aid offices are often able to show those interested in the program specific funding, or need-based money.

It is important to ensure that your child fills out the FAFSA (Free Application for Federal Student Aid), which can be found on studentaid.gov. Visit studentaid.gov before accepting any federal funds for you or your children to learn more about the types of aid and terms.

The maximum amount you can borrow is the total cost of your child’s attendance, minus any federal assistance they receive. You could be asked to pay a hefty amount depending on the aid your child receives.

You don’t need to borrow all the money requested.

Angela Ribuffo is a certified financial planner, president and advisor at Raion Financial Strategies in Alaska. She says: “Consider paying less for the whole thing.” Ribuffo suggests that parents can make payments for a year, preferably year 4, so they will have three years in which to save money. If you decide to borrow money, giving yourself some time to save will help you reduce the amount you need to borrow.

Set limits on the amount you can borrow, based on income and financial goals. You can use a calculator for parent PLUS loans to determine how different loan amounts will impact your monthly payments at an interest rate of 8.05%.

Try not to put your retirement savings ahead of funding the education of your children, no matter how hard it may be.

Lee: “We are not saying that retirement is more valuable than the future of your children.” It’s not that retirement is a fail-safe. ”

Lee advises that you be realistic when deciding whether to save for your retirement or contribute towards the education of your child. Lee explains that a student who can’t pay for college has more options than a retired person who doesn’t have enough income.