The Downside of Parent Direct PLUS Loans for College

Loan Application - shutterstock_143828770Q: Can you offer any advice regard­ing a loan we took out for our son for col­lege? I am a Vietnam-Era Vet­eran (USAF 1969–1973). In 2005, my son wanted to go to col­lege and I agreed to apply for a Par­ent Direct Loan with the under­stand­ing that my son take over the loan once he grad­u­ated col­lege and was a year into his first job. My son and I agreed to this, only on a hand­shake because I trusted in his word. Noth­ing was signed by him and he does not appear on the loan. My son went to SUNY Albany and grad­u­ated with high hon­ors in 2009, then decided to go for his Mas­ters. My wife and I are retir­ing in the next few years (she’s retir­ing in 2015, I will retire in 2016). Today I advised my son of our plans and that he needs to take over this loan when my wife retires next year. His response was that he never made any such agree­ment. I’m afraid that my wife and I are not going to be able to con­tinue with the monthly pay­ments on this loan when we retire. Can you please offer me any advice in this mat­ter? God bless you for any help you may be able to extend.

Respect­fully, Char­lie, New York

A: Uh-oh. I’m sorry to hear about the sit­u­a­tion with your son and I wish you all the best in get­ting this issue resolved with him. Unfor­tu­nately though, I’m afraid what I’m about to tell you prob­a­bly isn’t going to help much with that. From the infor­ma­tion you’ve pro­vided it sounds like there’s really not much you can do except keep pay­ing the loan and try to con­vince your son to change his perspective.

Par­ent Direct Loans Are Debts of the Par­ent
Even though you and your son agreed that he would pay back the loan you took out for him – and your son ben­e­fited from you doing it – from the lender’s per­spec­tive, the loan is your respon­si­bil­ity. While it’s arguable that your son could be morally oblig­ated to pay the loan back for you, he’s not, as far as the lender is con­cerned, oblig­ated to do so.

Alter­na­tive Arrange­ment
If you want to go there (and not here, because I’m not a lawyer!), you could cer­tainly talk with an attor­ney about the prospects to right this wrong in court. But, if you can’t get your son to coop­er­ate and you even­tu­ally find the bur­den of the pay­ment to be too much for your retire­ment incomes, one alter­na­tive might be to con­tact your loan ser­vicer to see if you can extend the pay­ment term, thereby reduc­ing the pay­ment. Just know that if you go this route you’ll ulti­mately pay more inter­est than if you keep the repay­ment term shorter. Even so, from a cash flow per­spec­tive, it could be a help­ful option.

Don’t Default
Finally, though you gave no indi­ca­tion you were even con­sid­er­ing such a move, what­ever you do, don’t default on the loan. Unlike many other forms of debt which can be dis­charged in bank­ruptcy or that will even­tu­ally (albeit painfully) go away if you stop pay­ing them, stu­dent loan debt has to be paid back. If you default, you could be sued and part or all of your fed­eral and state tax refunds could be taken as well as other state and fed­eral pay­ments includ­ing your Social Secu­rity ben­e­fits. Finally, if you’re still work­ing your wages could even be gar­nished. In other words, non-payment really is a non-option. They’re going to get their money back one way or another.

So I real­ize this prob­a­bly wasn’t the most uplift­ing piece of news you’ve ever received but I do hope that know­ing where you stand with this is help­ful. Thanks so much for your ques­tion and best of luck to you and your family.


USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor. The information is provided for informational purposes only and is not intended to substitute for obtaining professional financial advice. Please thoroughly research and seek professional representation before acting on any information you may have found in this article. This article is in no way attempts to provide advice that relates all personal circumstances.

Examples given are hypothetical illustrations and not an indication of the benefits or features of any USAA product. You should seek policies and advice based upon your own particular circumstances. Sample loans are for illustration purposes only and are not a rate quote, pre-approval, or commitment to lend.

Scott Halliwell and JJ Montanaro are CERTIFIED FINANCIAL PLANNER™ practitioners with USAA Financial Planning Services, one of the USAA family of companies. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

USAA Financial Planning Services® refers financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Company in California, Lic. #0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer. (known as USAA Financial Insurance Agency in California), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.

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