Parent Loans are a Bad Idea

PLUS CaptureYou are here most likely because you are trying to fund either your own education or your child’s education in a way that makes fiscal sense for you and for your family.

Long-time readers know that I am not a big fan of student loans. There are a very few reasons for why you should use them and more for why you should not.

So what does that look like in my personal life? My son graduated from college this spring and has no student loans. Imagine the feeling of freedom.

My daughter will be starting in the fall and, as part of her financial aid package, does have student loans. It is likely that she will graduate with those loans. There were reasons for why this made sense.

I will leave the reasoning here for another post, but it made sense in both situations.

What many colleges want you to do to fill the amazing gap between what FAFSA says that you can afford and what you can actually afford is to take out a parent loan.

However, here’s the kicker: The maximum student loan amount for a freshman is $5,500. A lot, but not overwhelming.

However, the maximum PLUS loan amount for a parent is “…the cost of attendance (determined by the school) minus any other financial assistance received.”

In other words, large amounts of cash. If student loans are the #2 reason for why college tuition is exploding, parent loans are #1.

It was very clear from some of the private colleges to which my daughter applied that the thinking was you should take out one of these loans each year. In at least one case, it would have been $120,000 over four years.

This would be the ultimate in stupidity.

For us.

Probably for most people.

I am fifty-three years old and heading toward retirement faster than I would like. It makes no fiscal sense at all to go $120K into debt. I would be trying to pay this off well into retirement.

Don’t do it. Just don’t do it. Find another way. There are many other ways.

The first step, though, is to realize that there is no one perfect school. With my daughter, she was accepted to a number of rather good colleges. No Ivy Leagues (to which she did not apply), but not that far removed.

The variety of financial aid offers varied widely. Same data, but colleges came to very different conclusions.

Bad things can happen when:

  1. You decide that there is one right college for Little Johnny and nothing else will do; or
  2. You don’t talk with your children about money.

We were very clear early on that we would take out no loans to fund college. We would pay what we could afford based on savings and salary, but that was it.

This is a conversation that we started when they were in high school and not at the last minute. It’s interesting how the conversation changes when they discover that you are not willing to go massively into debt in order to fund four years of their education.

Have this conversation now.