Parents who are considering taking out federal student loans for their children’s education are now facing a new challenge. The U.S. Department of Education recently announced that the interest rates on Parent PLUS loans will rise to 9.08% for the 2024-2025 academic year. This is the highest interest rate for parents in over three decades and marks a significant increase from the current rate of 8.05%. According to higher education expert Mark Kantrowitz, the last time rates were this high was in 1991-92 when they reached 9.34%.
With the soaring costs of college education, more parents are turning to student loans to help cover the expenses. Data from the 2019-2020 academic year shows that the average parent PLUS borrower had a balance of over $40,000 by the time their child graduated, compared to around $26,000 in 2010-2011 (adjusted for inflation). This trend indicates that parents are increasingly taking on larger amounts of debt to finance their children’s education.
Experts warn that parents should be cautious when borrowing student loans and should not borrow more than their annual income. Kantrowitz suggests that parents adhere to a strict rule of limiting their total student loan debt to their combined annual income, ensuring that they can repay the loans within a reasonable timeframe. However, individual circumstances vary, and factors such as retirement plans and existing debt should be taken into account when considering borrowing student loans.
When faced with the decision to take on more debt to finance their child’s education, parents should explore alternative options. These may include enrolling in a more affordable college, encouraging student employment, and applying for scholarships. Kantrowitz emphasizes that attending an in-state public college can offer a cost-effective alternative to private institutions while still providing a quality education. It is important for parents to carefully evaluate their financial situation and choose the best option for their family.
For parents who do decide to take out PLUS loans, experts recommend against deferring loan payments while their child is in school. Betsy Mayotte, president of The Institute of Student Loan Advisors, warns that deferring payments can lead to increased total interest on the loan. Parents should carefully consider the implications of taking on additional debt and strive to create a manageable repayment plan that aligns with their financial goals.
The rising interest rates on Parent PLUS loans present a significant financial challenge for parents. It is crucial for parents to carefully assess their financial situation, explore alternative options, and make informed decisions when it comes to borrowing student loans for their children’s education. By planning ahead and seeking expert advice, parents can navigate the complexities of student loan borrowing and ensure a secure financial future for themselves and their families.