Is the Parent Plus Loan a smart strategy?

Harvard wiki

Jack Schacht By Jack Schacht

The last thing parents need is another $50,000 to $100,000 in college debt after the kids have finally graduated from college.

While that sentiment is appreciated, the Parent Plus Loan can also be a wise course of action depending on your financial situation.

The provisions of the Parent Plus loan can be confusing, like most other government programs. And most parents probably don’t even know about them.

For starters, the loan only has to be signed by one parent and only that parent is responsible for paying it back. If that parent dies or is disabled, the balance is completely forgiven and does not fall on the other parent to pay off.

That’s important to know because it would obviously be smart to have the loan signed by the older parent or by the parent who, for whatever reason, may have a lower life-expectancy.

Another piece of useful information is that payments on the loan can be postponed even beyond the time all children have graduated from college under a little known “forbearance” program. Accordingly, a 55 year old parent who has three children to educate may not have to start making payments until their early seventies.

When it finally comes time to “pay the piper,” the loan can be refinanced into a Federal Direct Consolidation Loan.

If you consolidate the loan under this specific program, you are now eligible to enroll in the Income Contingent Repayment Program. Though not as generous as the student’s “Pay as You Earn” program, it operates under the same concept and pegs monthly payments to the borrower’s income and family size. After all the delays, the newly consolidated loan can be extended for up to 25 years, after which any balance is forgiven.

All of this begs some important questions:

* Should you really reduce funding your retirement accounts so you can start paying this loan back right away?

* Should you, perhaps, pay back the interest only and hold off on the payments of your principal for as long as the government will allow you to defer those payments?

* Or should you defer both interest and principal payments and, instead, us that additional money for your retirement funding?

Obviously, before you do anything, you should sit down with your financial advisor and run the numbers.

You may find that there is a big pay-off from this strategy. The Parent Plus loan is charging you simple interest while your retirement accounts are paying you compounded interest.

So what looks like a dumb idea (deferring your loan payments until old age) may be one of your smartest strategies of all!

Jack Schacht is the founder of, an organization that brings together experts from both the academic and financial services communities who work in coordination to help families find the right college for the right price. Contact him at 630.871.3300.