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By Nicole Levitt, Attorney at Law. Licensed Professional Counselor
College costs have exponentially exploded in the past decade, while the average student and parents have received little or no increase in income and a net decrease in overall wealth. Many college students find that even after they maxed out the amount of financial aid available to them, they still cannot afford to attend their chosen college.
This has resulted in many Bucks County parents worrying over how to help finance their child’s college education once the child has maxed out their financial aid. In the not-too-distant past, many parents in this situation relied on using the equity built up in their homes to make up the tuition shortfall, but after the housing crash and the Great Recession, these parents now find that they have little or no home equity to fall back on. Enter the Parent Plus Federal Loan Program. The Parent Plus loan program allows a parent to take out loans to fund their children’s education. The loans belong to the parent and are in the parent’s name only, not the child’s and the parent is solely responsible for paying this loans back, often at an above-market interest rate. The child can “promise” to pay back the parent, but there is absolutely no legal requirement that the child do so. (“Dad, I’d love to help you pay back the $100,000 Parent Plus loan for my Harvard English degree, but my customer service job only pays $11.50 per hour).
But, what happens to a Parents Plus loan if the parents subsequently divorce? Online student loan message boards are awash with stories of one parent getting stuck with the entire burden of a Parent Plus loan. In Pennsylvania, if both parents sign for a Parent Plus loan during the marriage, courts will categorize the loan as “marital debt,” which is subject to being divided and assigned in equitable distribution. But what if only one parent signs for the loan? Can the other parent be assigned their share of that debt in divorce? In one Pennsylvania case, the Wife took out Parent Plus loans in her name only, and the parties divorced later on. In a “he-said, she-said” legal tango, the Wife asserted that the Husband told her to take out the loans as part of a marital decision, while the Husband denied having anything to do with the loans. The Court held that Wife did not adequately prove that they had agreed on taking out the loans as a joint decision. Thus, Wife was left holding the (extraordinarily expensive) bag.
In addition to potential divorce issues, parents considering Parent Plus loans should note that these loans do not have many of the standard student loan protections such as graduated repayment, income-sensitive repayment, and deferment options. Also, parents nearing retirement age should seriously consider how this loan will affect their retirement lifestyle and their credit rating in seeking a mortgage on for their retirement home.
Parents who cosign their children’s student loans are in a similar position. They are responsible for the entire loan if their children can’t or won’t pay. The co-signing parent’s credit will also take a hit if payments are late. In reality, co-signing a student loan is like taking a student loan out in your own name.
In short, no matter how much parents loves their college-age child, parents should think long and hard about the possible negative future repercussions of taking out these types of loans or even cosigning a student loan. For more information (and for those that want a good scare before Halloween), see the Chronicle of Higher Education article entitled, “The Parent Loan Trap.”