Parent PLUS loans account for almost a quarter of new federal borrowing for undergraduates. And although they are just 6% of the $1.57 trillion in current federal student debt, these loans are problematic because they allow families to borrow without regard to their ability to repay. If a parent loan borrower defaults, the government can collect through wage garnishment and Social Security and tax refund offsets. To top it off, Parent PLUS loans, like all federal higher education loans, are difficult to discharge in bankruptcy.
If you've already filed bankruptcy or are considering filing, it's crucial to understand how Parent PLUS Loans and bankruptcy work together.
What is a PLUS Program Loan?
Parent PLUS Loans are federal student loans parents can take out to pay for their child's college education. According to the latest data found on Federal Student Aid, the total Parent PLUS Loan debt is $103.6 billion, spread amongst 3.6 million borrowers.
Parents are allowed to borrow up to their child's cost of attendance minus any other financial aid they receive. While Parent PLUS Loans benefit your child, they come at a cost to you. The loan costs for Parent PLUS Loans are a bit higher than those of other federal loans like Direct Loans or Federal Perkins Loans. Parents have to pay a loan origination fee of 4.228% (the fee's deducted from the loan disbursement), and they are charged an interest rate that's nearly double the rate student borrowers are charged.
- Direct Subsidized Loan: 3.73%
- Direct Unsubsidized Loan: 3.73%
- Direct Graduate PLUS Loan Unsubsidized: 5.28%
- Direct Parent PLUS 6.28%
The interest rate for Direct Consolidation Loans is based on the weighted average of the interest rate of the loans included in the consolidation application.
How does bankruptcy affect Parent PLUS loan eligibility?
Filing bankruptcy does not automatically stop you or your spouse from borrowing a Parent PLUS Loan. Federal law prohibits the US Department of Education from denying you access to Federal Student Aid because you filed bankruptcy or are currently in bankruptcy. Bankruptcy Code, 11 USC § 525(c).
However, the Higher Education Act allows your loan application to be denied if a credit check reveals you have an "adverse credit history." An adverse credit history includes current delinquency of 90 or more days on any debt or a "default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a Title IV debt" within the last five years.
How to get a Parent PLUS Loan with an adverse credit history
Borrowers with adverse credit can still get a PLUS Loan if they complete PLUS Credit Counseling and do one of the following:
- Apply with an endorser who doesn't have an adverse credit history. An endorser is like a cosigner in that they are someone who agrees to pay your student loan debt if you default. Your cosigner can complete an endorser addendum online using their FSA ID.
- Appeal the credit decision. The Department allows you to appeal a denial for two reasons: the information on your credit report is incorrect, or there are extenuating circumstances related to your credit. Before submitting your appeal, check the FSA site to see what documentation you can submit in support. Once the Department receives your appeal, it will issue its determination within 10 business days.
What happens if you're denied a Parent PLUS loan?
If you're denied a Parent PLUS Loan, the Department of Education will increase the loan limit your child can borrow. For their first and second years in school, they'll be able to borrow an additional $4,000 in unsubsidized Stafford Loans. For their third year and beyond, their limit will increase by an extra $5,000 annually.
You can also look into borrowing private education loans.
What happens to Parent PLUS Loans in bankruptcy?
Filing bankruptcy typically puts your Parent PLUS Loans into an administrative forbearance until your case ends. However, if your bankruptcy attorney put you in Chapter 13, you may want to keep making loan payments. If not, you may lose three to five years of credit towards loan forgiveness. Plus, interest will continue to be added to your balance.
Can Parent PLUS loans be discharged in bankruptcy?
Parent PLUS Loans can be discharged in both Chapter 7 bankruptcy and Chapter 13 bankruptcy like other types of federal and private student loans. But you first have to file a lawsuit in your bankruptcy case called an adversary proceeding. In the adversary complaint, you'll have to show the bankruptcy judge that repaying the loans would cause an undue hardship to you and your dependents. Meeting the undue hardship standard for student loan discharge is challenging.
Most bankruptcy courts use the Brunner Test to determine if you've met the standard. The Brunner Test reviews three criteria:
- Your current income. Based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans.
- Your future financial situation. Your current financial situation is likely to continue for a significant part of the repayment period.
- Your good faith efforts. You've made monthly payments, requested deferment and deferment, and have applied for income-driven repayment and loan consolidation.
You can read more about the student loan bankruptcy process here.
Parent PLUS Loan Discharge Options
The federal government offers Parent PLUS Loan Forgiveness and discharge options for parents that
- work in public service (e.g., for the government or qualifying nonprofit)
- make 20/25 years of qualifying payments (Income-Contingent Repayment Plan Forgiveness)
- become permanently disabled (Total and Permanent Disability Discharge)
- they die, or the child they borrowed the loans for dies (Death Discharge)
Note: To qualify for PSLF, the parent who borrowed the loan must work in public service and have loans made under the Direct Loan Program. If you borrowed Parent PLUS Loans for a child who went to school before 2011, you might have loans that don't qualify for PSLF. Check studentaid.gov to see what type of loans you borrowed.
Options if your Parent PLUS Loans aren't dischargeable
If you're unable to discharge your Parent PLUS Loans in bankruptcy, here are two other options to consider:
- Request a lower payment: parent borrowers who can't afford their monthly payment can request an amount based on 20% of their discretionary income by applying for an income-driven repayment plan. If you haven't already done so, you will need to apply for a Federal Direct Consolidation Loan to qualify for the IDR plan.
- Refinance for a lower interest rate: depending on your credit score, refinancing with a private lender can get you a much lower interest rate. But refinancing federal loan debt into a private student loan causes you to lose certain federal benefits like income-based repayment options, deferment, forbearance, and loan forgiveness.
Want help with a Parent PLUS Loan? Let's talk.
Parent PLUS Loans can be challenging to deal with. It seems like no matter what you do, your loan servicer refuses to give you an affordable payment. Plus, the interest rate is insane.
I get it. I've helped many parents explore their repayment options to develop a payment plan to deal with their loans. Let me do the same for you. Schedule a free 10-minute call with me. I'll get a better understanding of your situation and what you want to accomplish, and when.
From there, we can create a plan to get your Parent PLUS Loans in order, so you can live your life without having to worry about the debt you borrowed for your child taking your home, garnishing your retirement, etc.