Say NO to Student Debt (Part II)
January 22, 2014A couple of weeks ago, I discussed a call from a father who was trying to do the right thing by helping his daughter pay for her education through the use of parent loans, a.k.a. PLUS loans. PLUS loans are often used to help pay for education when there is an insufficient amount available through regular student loans, savings, or other forms of borrowing. In many cases, PLUS loan repayments begin within 60 days of disbursement but in some cases, repayments can be deferred until 6 months after graduation.
For this caller, the plan was for his daughter to help pay back the loan following graduation but when she was unable to find a decent paying job, her father was on the hook for repaying the loans. His grace period ends in January and he is not sure what he is going to do. As mentioned in the previous post, educational loans generally cannot be discharged through bankruptcy and failure to pay them back has steep consequences.
Sadly, this is not an isolated event. According to the White House Office of Management and Budget, the 2014 federal budget estimates the lifetime default rate at 7.5%. If you or someone you know is at risk of defaulting on a PLUS loan, here are some things you may want to try:
1. Reach out to your current loan servicer
If you think you are going to miss a loan payment, contact your loan servicer to see if they can restructure your loan. If you are not making progress with the first person you speak to, ask if you can speak with someone with more authority. Depending on the type of loan you have, there may be 3 repayment options available to you: standard, extended, and graduated. Discuss with your loan servicer which of these may make the most sense given your current financial situation.
2. Refinance into a Federal Direct Consolidation Loan
Parents that take out PLUS loans may not qualify for the same repayment breaks available to student borrowers so Mark Kantrowitz, a financial aid expert, suggests refinancing through a Federal Direct Consolidation Loan. These loans may be eligible for repayments options that parent loans are not, such as income-contingent repayments.
3. Refinance with a peer-to-peer education loan
Peer-to-peer lending is becoming more popular as technology can now match up investors that have money to lend with borrowers that may not qualify for traditional loans. There are a number of companies that offer peer-to-peer loans, including Fynanz, Prosper, and Lending Club.
4. Refinance with a home equity or retirement plan loan.
Home equity loans have favorable interest rates and tax benefits. However, you must use the equity in your home as collateral. This could make matters worse if you are unable to make payments.
Retirement plan loans do not require a credit check and allow you to pay interest to yourself. There are costs though. By removing funds from your retirement account, you lose potential earnings (not to mention the fact that you end up paying taxes twice on the interest).
The options described above may not be ideal, but they may be better than facing the consequences of a default. If you do go into default, you can contact this default resolution group. Regardless of your situation, the key is to understand the options available to you. That knowledge can be just as important as the education you paid for.