Desperate times call for desperate measures. At least, that’s what some parents might think when it comes to helping their kids pay for a college degree.
In fact, an unknown percentage of parents who are borrowing money to help cover their dependent’s higher education expenses are already planning to die before they have to pay it back — or at least make it to retirement when their income is so low they won’t have to make any substantial payments to the loans. In fact, 23% of all student loan borrowers are 50 or older, according to EducationData.org.
There’s a whole timeline and strategy nearly anyone can follow to accomplish this task — essentially, it involves borrowing for college with Parent PLUS loans, moving them into forbearance multiple times, consolidating them and running out the clock to get to the age where Social Security benefits can apply. At that point, the goal is getting income low enough to qualify for a $0 monthly payment until death (or at least until the loans are forgiven).
The strategy is definitely a mixed bag. On one hand, you likely shouldn’t pursue this strategy from the outset. And for some families, the timeline and income level simply won’t work.
But on the other hand, it can make families as a whole wealthier and something that financial planners may advocate. For older families, potentially not paying Parent PLUS loans could be the strategy they take. Regardless, it shouldn’t be an inadvertent approach.
If you think this sounds incredibly complicated, risky and even a little bit sad, that’s because it is.
However, for older parents, it can also be a viable strategy that can actually help increase family generational wealth.
What Are Parent PLUS Loans Exactly?
Parent PLUS loans are federal student loans that are geared to biological parents, adoptive parents and step-parents who have a dependent undergraduate student who attends an institution of higher education. These loans are different from other other types of federal student loans in several ways, including the fact borrowers have to pass a credit check to be approved.
Federal student loans for parents also let borrowers take out considerably more funding for school than most other student loans backed by the government. In fact, Studentaid.gov says the limit for borrowing with these loans is set at “the cost of attendance at the school your child will attend minus any other financial assistance your child receives.” In other words, the sky’s the limit.
Interest rates are also considerably higher for Parent PLUS loans. In fact, current student loan rates for loans first disbursed on or after July 1, 2023, and before July 1, 2024 are set at 8.05%. Compare that to fixed rates currently offered on Direct Subsidized Loans and Direct Unsubsidized Loans for undergraduate students, which are currently set at 5.50%.
There is also an upfront loan fee for Parent PLUS loans, which is automatically deducted from each disbursement. This fee comes in at 4.228% for all Direct PLUS loans disbursed on or after Oct. 1, 2020.
Borrow And Die Parent PLUS Loan Strategy
Knowing the details of Parent PLUS loans makes it easy to see the problem. Desperate parents may rely on these loans to help their dependents get through college, and there are no loan limits to prevent overborrowing other than how much tuition a school wants to charge. Interest rates are also higher than you find with other federal student loans, so monthly payments are much more expensive as a result.
That’s why some parents decide to never pay these loans back if all goes according to plan. But interestingly, it can also be a savvy overall financial move as well. It can lead to more generational wealth for families, especially modest income families. These families can benefit by not committing dollars that may be stretched thin to student loans that may eventually be forgiven anyway.
Here’s how some parents plan to apply this strategy.
- Step 1: Borrow money for school with Parent PLUS loans. The first step is taking out Parent PLUS loans to help pay for higher education, which are automatically unsubsidized and may be enough to cover full college tuition and fees minus any student aid received. And parents won’t have to make any payments on a Parent PLUS loan until 6 months after the borrower leaves school.
- Step 2: Move loans into forbearance for 36 months. When repayment does resume, borrowers request forbearance — which includes a pause on monthly payments — on Parent PLUS loans for 12 months at a time. There is also a cumulative limit on forbearance that lasts for up to 36 months.
- Step 3: Consolidate Parent PLUS loans. After time in forbearance has passed, parents take steps to consolidate Parent PLUS loans with a Direct Consolidation Loan.
- Step 4: Request forbearance for another 36 months. After Parent PLUS loans have been consolidated and turn into another loan altogether, they become eligible for forbearance again.
- Step 5: Make it to at least age 62. After taking advantage of forbearance periods and loan consolidation, parents using this strategy try to get to the age of 62. This is the point where they can begin collecting Social Security benefits and potentially retire.
- Step 6: Qualify for a $0 monthly payment on an Income-Contingent Repayment plan. If someone has a low income due to quitting work and collecting Social Security, they can likely qualify for a $0 monthly payment on an ICR plan for federal student loans.
- Step 7: Die. As long as income remains low, borrowers can continue owing as little as $0 toward their consolidated loans through ICR. If nothing changes, payments can stay at $0 until death.
- Step 8: Have loans forgiven. At this point, the debt is over. “A parent PLUS loan is discharged if the parent dies or if the student on whose behalf a parent obtained the loan dies,” reads studentaid.gov. The loan forgiveness could have tax implications for the parent’s estate, but it would be less than the potential bill due anyway.
If you notice the timeline, it’s possible that a parent can avoid paying on these student loans for around 10 to 11 years before having to even consider a repayment plan: four years while the student is in college, three years of the first forbearance, and three years for the second forbearance.
Assuming an older parent in their 50s, you can get to retirement age and potentially a low income for when repayment would be required. At that point, the $0/month payment applies until death or the loans are discharged (at 25 years under ICR).
This strategy sounds counter-intuitive to many debt repayment approaches, but following it can actually make families wealthier in aggregate.
In many Parent PLUS Loan situations, either the parent is repaying the loan, or the parent asks the child to repay the loan. Either way, these monthly payments are coming out of the family’s potential to build wealth.
For a parent, it could be future funds left for the child, or it could be needed wealth to live on during retirement. For a child, repaying the parent’s loan could cost a lot of compounding and wealth building.
Depending on a parent’s income level, this strategy could effectively give a child a leg up financially.
However, it won’t work for young families with parents that have many years left in the workforce. The strategy is about delaying repayment until income is lower (in retirement). If that’s more than 10-plus years away, this strategy will be difficult to pull off.
A Better Way To Deal With College Costs
Higher education costs and student debt are out of control, and who wants their child to graduate from college with a crushing amount of student loan debt to pay off?
Depending on the timeframe you have to focus on paying for college, there may be better ways to cover college tuition and fees, and to pay less for college to begin with.
For example, young people can consider completing the first two years of school at a community college then transferring to a four-year university from there. Of course, it’s also possible to apply for scholarships and grants, work part time during college to keep costs down, or both.
More importantly, only consider schools that are within the family budget to begin with. This will help you avoid Parent PLUS loans and their high costs. Also remember that students who stick to federal student loans can pay off their own debts with income-driven repayment plans like the Saving on a Valuable Education program and qualify for lower monthly payments than were available in the past. In fact, monthly payments for undergraduate students on the SAVE plan work out to just 5% of discretionary income, and the U.S. Department of Education says approximately 2.9 million people paying off debt with the plan qualify for a $0 monthly payment toward their loans.