Posts Tagged "Relief"

Pushing a rock up a hill

Parent PLUS Debt Relief: the Good and Bad

Some 3.6 million parents are paying off more than $100 billion in debt used to fund their children’s college education. For many parents, the federal Parent Loan for Undergraduate Students (PLUS) was the only way they could afford college, but many are now struggling to make the monthly payments.

In a Harris poll in July, nearly one in three said they regret the decision to borrow. If these parents need relief, they have two basic options: enter into the government’s repayment plan for PLUS loans or refinance their federal student loans through a private lender such as a bank. Both options have significant downsides.

Anna HelhoskiAnna Helhoski

Anna Helhoski, a student loan expert with the financial website, NerdWallet, explained the good and bad in the federal government’s income-contingent repayment program for parents overburdened by college debt.

Before we get into the details of this option, how big a problem is this?

We do know that parent PLUS borrowers are one of the fastest growing groups of people with student loans. With any student loan, you borrow to afford the degree so you can earn the money to repay the loan. But the conflict with parent PLUS loans is that you get the debt, but you don’t reap the higher earnings that come with a new degree. PLUS loans were originally meant to provide liquid funds for families with higher assets. But when it was opened up to more borrowers in 1992, it became a lot easier to take on more debt, and college costs were going up, so it became more of a necessity to access it.

Parents can easily rack up six-figure debt. The only requirement is that they don’t have adverse credit histories. PLUS loans are really easy to get and difficult to pay back.  Repayment for parents – it’s probably the No. 1 question I get from anyone around repaying student loans.

Wouldn’t this be a particular concern for parents close to retirement age? 

We know that is happening. Parents are putting off retirement because they can’t simply afford to retire because they have this debt looming.

Parents can get help from the federal government in the form of an income-contingent repayment plan (ICR). Generally, how does it work?

The standard repayment plan for new student loans is 10 years. But if parents are struggling to pay that debt, they have only one option: income-contingent payments over 25 years. The payments are set at 20 percent of their adjusted gross income on their tax filings, also known as discretionary income. And they can only get that if they first consolidate and then apply for the ICR program.

It’s not means-tested, so any parent PLUS borrower can qualify for ICR, but they are required to combine all of their PLUS loans first into a federal consolidation loan. If you don’t want to consolidate, you can’t access ICR.

What are the downsides of consolidation?

Your payments may be lower when you consolidate but you’re going to be paying the loans off over a longer period of time, which means you’ll pay more in interest over time. If you consolidate but don’t go into the ICR program, your term will be between 10 and 30 years – the larger the loan balance, the longer the term. The other downside of consolidation is that any outstanding interest on your existing loan balance will be added to the principal of your consolidation loan. You’ll be paying interest on your interest. If you consolidate and then enter the ICR repayment plan — the only option if you want to pin your payments to how much you can afford based on your income — your new term length will always be 25 years.

Given the downsides of ICR plans, what is the profile of the parents who could benefit? Learn More

The Cares Act

CARES Act’s Loan Forbearance is Working

As the pandemic was sinking into our collective consciousness a year ago, Congress, fearing economic calamity, allowed Americans to temporarily halt their mortgage and student loan payments.

By the end of October – seven months after President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act – Americans had postponed some $43 billion in debt, including car loans and credit cards, which many lenders deferred voluntarily. Billions more are still being added to the total amount in forbearance.

Fast action in Congress “resulted in substantial financial relief for households,” says a new study by researchers at some of the nation’s top business schools. Their recent analysis found that the assistance went where it was needed – to “financially vulnerable borrowers living in regions that experienced the highest COVID-19 infection rates and the greatest deterioration in their economic conditions.”

When lenders grant forbearance they agree to waive their customers’ debt payments for a specified period of time. For example, Congress said borrowers could request that their payments on federally backed mortgages be deferred by six months to a year.

Although forbearance was less visible than the checks taxpayers also received under the CARES Act, the financial lift was equally potent. Customers who received loan forbearance saved an average of $3,200 just on their mortgages last year – this compares with $3,400 in stimulus checks for a family of four.

Congress also automatically suspended all payments on federal student loans, saving borrowers an average $140 last year, and President Biden has just extended the forbearance until at least Oct. 1. Lenders, in an attempt to prevent massive loan defaults on their books, voluntarily gave consumers a break last year on two types of loans that weren’t part of the CARES Act: automobile loans ($430 saved) and credit cards ($70 saved).

Forbearance is only temporary relief, because the missed payments will eventually have to be made up. But in a telling indication that borrowers didn’t want to fall behind, just a third of the people who asked for debt relief actually used it. In these cases, forbearance “acts as a credit line” borrowers can draw on – if they really need it. …Learn More