Parent PLUS Student Loans and North Carolina Bankruptcy

The ups and downs of Parent PLUS loans 

Image by Scott Webb via Unsplash

College gets more expensive by the year, and many parents want to foot the bill to get their kids through school. Unless you are independently wealthy or managed to amass a sizable college account, it can be a financial reach. For many parents who want to make sure the next generation gets a degree, that means taking on debt. One of the most common forms of finance is the Parent Loan for Undergraduate Students (PLUS) loan.

How PLUS loans work

Only parents can take out a PLUS loan. Grandparents are only allowed to do so if they’ve formally adopted the student. Parents can borrow under the PLUS program to cover school expenses. Adult students and grad students can also tap the PLUS loan program as they are financing their own education.

Parent PLUS loans are at a fixed interest rate. The offered rate may change from time to time. However, the interest rate is locked in from when you take the loan. It’s currently around 7% which is higher than other forms of federal student loans – and higher than many prevailing private student loan interest rates.

The side effects of PLUS loans

Many parents don’t stop to consider the long-term effects of borrowing to pay for their kids’ college education. They feel obligated and sign on the dotted line, but the consequences of non-payment can be dire.

Some downsides of parent PLUS loans include:

• Interest rates are higher than private loans and other federal loans
• You’re ineligible for most income-driven repayment plans  
• You must pay an origination fee of close to 5% of funds borrowed
• You must begin paying on the debt right away (versus after graduation with other fed loans)
• You must pass a credit check unlike with many federal loans

There are lots of good things about the program as well. Some benefits of the PLUS program include:

• Generous loan amounts to help cover any financial aid shortfalls
• You can tap the Income-Contingent Repayment (ICR) plan 
• You may qualify for Public Service Loan Forgiveness

PLUS Loans and bankruptcy

Assuming you can afford to pay back what you borrowed under the Parent PLUS program, it might be no big deal. However, many parents find they’re stuck with this debt in a time when their income is on the decline. One solution is to get your kid to pony up the loan payments since they’re the one that benefited from the debt.

Options to consider:

• Have your kid refinance the PLUS loan into a private loan under their name
• Refinance the debt into a private loan so it will have a statute of limitations
• Seek deferment or forbearance while you sort out your finances

When you can’t afford to pay your student loans, debt collectors for federal loan servicers can make your life a nightmare. They can garnish your wages (most other creditors in North Carolina cannot), take your income tax refund, and wreck your credit score. Plus, federal student loans have no statute of limitations so that these negative outcomes can continue indefinitely.

Depending on your circumstances, bankruptcy might be a solution. The standard for discharge of student debt in bankruptcy is “undue hardship” but what that means is up to the court. If you’re a senior on a limited income, have a chronic illness, or other extenuating circumstances, you might qualify for reduction or discharge of PLUS loans and other student debt in bankruptcy.

If student loans are making your life miserable and ruining your finances, it’s time to discuss your options and find out whether bankruptcy might help. Less than 1% of bankruptcy filers seek help with student loans, but of those who do, many get partial or total relief.

To find out more, contact the Law Offices of John T. Orcutt to speak to one of our experts. Read reviews from clients, then call +1-833-627-0115 to schedule a free student loan bankruptcy consultation at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro or Wilmington.