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Do your research: Parent PLUS loans can be more expensive than you think

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One of the more popular ways families find money to help pay for college is through the use of federal Parent PLUS loans. In a nutshell, the Parent PLUS loan program provides unsubsidized loans to any parent on behalf of their child up to the cost of attending college (including living expenses) minus all other student aid.

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Hint: Everyone who completes the FAFSA is invited to apply for a PLUS loan regardless of income.

What makes Parent PLUS loans different from other federal student loans is that interest rates are higher—6.41 percent versus 3.86 percent—and payments begin immediately after funds are disbursed. Note that PLUS loans are a debt incurred strictly by parents and cannot be transferred to the child.

And like other federal loans, they are nearly impossible to discharge in bankruptcy.

Despite the less-than-ideal terms, PLUS loans have become popular tools for financing the cost of increasingly expensive postsecondary education. At the program’s peak in 2011 (before stiffer parent credit checks went into effect), there were almost one million borrowers and $11 billion in disbursements. And in the 2011-12 academic year, about 13.8 percent of undergraduate students had parents who borrowed PLUS loans on their behalf.

But it’s a controversial program insofar questions persist as to ease of use and the level of debt incurred by uninformed or naïve families anxious to support the college dreams of their children.

For this reason, various oversight agencies have begun taking a closer look at who is using Parent PLUS loans and to what end. Equally concerning is how various colleges and universities benefit from the availability of these loans.

From data collected by the Chronicle of Higher Education, here are the colleges where parents had the highest average loan size in 2010-11:

  • French Culinary Institute*: $37,522
  • Berklee College of Music: $33,092
  • Art Center College of Design: $33,070
  • Boston Conservatory: $30,138
  • West Coast University*: $29,484
  • Brooks Institute*: $29,341
  • Rhode Island School of Design: $29,255
  • Full Sail University*: $28,634
  • Embry-Riddle Aeronautical University: $28,137
  • New York Conservatory for Dramatic Arts*: $27,432
  • New York University: $27,305
  • Neumont University*: $27,278
  • Dartmouth College: $26,978
  • California Institute of the Arts: $26742
  • American Musical and Dramatic Academy: $26,667

The American Enterprise Institute (AIE) has also been tracking where PLUS loans are popular tools for financing education. According to the AIE, the top 15 colleges receiving Parent PLUS by disbursement amount in 2012-13 were

  • New York University: $127.32M
  • Arizona State University: $80.14M
  • Michigan State University: $75.01M
  • University of Illinois at Urbana-Champaign: $73.09M
  • Saint John’s University: $66.17M
  • University of Texas at Austin: $63.15M
  • Savannah College of Art and Design: $62.38M
  • Full Sail University*: $57.59M
  • Purdue University: $56.14M
  • West Virginia University: $55.92M
  • DePaul University: $55.44M
  • University of Oregon: $51.65M
  • Ohio State University: $48.74M
  • University of Cincinnati: $48.74M
  • Columbia College: $47.77M

Before agreeing to a Parent PLUS loan, do your research. One good resource College Reality Check, which is an interactive website designed to guide prospective college students and their families using comparisons of key statistics such as net price, debt at graduation, and monthly loan payments.

And be sure to cover your bases by looking at institutional outcomes such as graduation rates, job placement statistics, and average earnings of recent grads. CollegeMeasures.org provides earnings of recent graduates from Tennessee, Virginia, Colorado, Texas and Florida colleges and universities.

At the end of the day, Parent PLUS can be an expensive form of financing that potentially puts parental assets and retirement at risk. So educate yourself before blindly signing off on more debt than your graduate can ever hope to cover in a reasonable amount of time.

*For profit institution

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