Parents of college students who may have taken out loans in order to help their children pay for college stand to benefit from President Joe Biden’s proposal to erase some student debt, a potential bonanza for the retirement savings of older Americans who qualify.
This past week, President Biden presented a one-time proposal to forgive up to $10,000 in student debt for borrowers without Pell grants; borrowers with Pell grants, who often have lower incomes, are eligible for up to $10,000 in extra relief. In addition to receiving the Pell grant, the borrower’s income must be less than $125,000 for individuals or $250,000 for families.
The proposal includes Parent PLUS loans, which are federal loans taken out by parents to assist their children in paying for college. In families where the student and the parent took out qualified loans independently, both would be entitled to relief. Private loans and loans taken out after June 30, 2022, do not eligible for forgiveness.
Student loan debt has crippled millions of younger Americans. Still, it may also have far-reaching repercussions for older individuals, who are often urged to prioritize retirement savings above spending for their children’s education. In accordance with estimates from the U.S. Department of Education, more than a third of the 43 million Americans eligible for loan forgiveness are 40 or older, including 5% who are seniors. In 2019, 20% of all outstanding student loans were held by borrowers aged 50 or older, as reported by the Federal Reserve Bank of Philadelphia. According to the study, three-quarters of borrowers aged 60 or older indicated they took out the loan to assist a family member pay for education.
Those with college debt are likely to have fewer retirement savings than those without such debt. Student debts are practically tricky to discharge via bankruptcy; Seniors are also more likely to fail than younger borrowers, placing them in danger of having up to 15 percent of their Social Security benefits garnished.
The Century Foundation’s Peter Granville, a senior policy associate, said most senior debtors whose benefits are now being garnished have less than $10,000 in outstanding debts, so they will gain from Biden’s Student Debt Forgiveness.
Before you consider applying for a Parent PLUS loan, you should examine the following factors:
Be Strategic
Due to the ever-increasing cost of college tuition, families are evaluating the return on their education investment, according to Dan Griffith, head of wealth planning for Huntington Private Bank. “Does it make sense to attend a small private institution to get a degree in theater, or should one instead attend a large public university?”
According to Jody D’Agostini, a certified financial planner with Equitable Advisors/Falcon Financial Group, advises not to take out more loans than your child’s anticipated beginning pay for their first year of work. If you major in sociology and expect to earn $30,000 upon graduation, you don’t want to borrow $60,000, she added. The arithmetic doesn’t work.
Consider, in addition to the public vs. private and in-state vs. out-of-state factors, that some institutions are more generous than others with merit and need-based help.
Granville said that the College Scorecard maintained by the U.S. Department of Education has information on the school’s net price, which may be used to measure the institution’s generosity. The net price is the amount families pay after all grants, including need-based and merit-based assistance, and schools that have a net price that is a smaller percentage of the sticker price tend to give out more help.
Determine Your Financial Limits
Many universities will propose an amount that parents may borrow in Parent PLUS loans to cover the expense of their child’s education. They will often recommend that you make up the gap between the student’s financial help and all costs associated with the student’s attendance, including room and board, tuition, transportation, and books.
These loans are not underwritten like a mortgage, in which the lender evaluates the borrower’s income and repayment capacity. Lynn O’Shaughnessy, a college consultant at Thecollegesolution.com, said the PLUS does not take your ability to pay into account. That decision is up to you. In this regard, O’Shaughnessy favors the student debt calculator on NerdWallet. Moreover, you may always borrow less than the advised amount if you decide to borrow. People make emotional choices for their children without considering what this entails for them, O’Shaughnessy stated.