My daughter was just accepted to her ideal university, but even with 529 savings, grants, and scholarships, I predict that if she graduates in four years, she will still need to borrow nearly $80,000. Im considering taking out a PLUS loan to help cover the cost. What should I know?.
First, congratulations on your daughters acceptance to college and her financial aid package. Because they believe their children won’t be eligible for grants or scholarships, many higher-income parents choose not to apply for financial aid, even though this is frequently untrue.
Still, as youre discovering, even a generous financial aid package wont always cover all the costs. Under such circumstances, a Parent Loan for Undergraduate Students (PLUS) is a popular option for parents who need financial assistance. Lets look at how PLUS loans work and what to consider before assuming such debt.
Adoptive or biological parents of dependent undergraduate students may apply for Direct PLUS Loans, also known as Parent Plus Loans, which are federal loans that can be used to pay for educational costs not covered by other forms of financial aid. However, as with all forms of borrowing, there are benefits and drawbacks to PLUS loans. Here are the most important to consider.
In all three cases, payments are due within 60 days of receiving the funds. On the other hand, if your child is enrolled in an eligible school at least half-time, you may choose to postpone repayment. Loan deferments expire six months after your child graduates, unenrolls, or falls below half-time status.
A look at who qualifies for tax-deductible student loan interest—and how to calculate a reduced deduction.
Use the following formula to determine how much your deduction will be lowered if your MAGI is within the phaseout range:
Navigating the college financing maze can feel like a never-ending quest, especially with the ever-growing burden of student debt Many parents are stepping up to the plate, taking on PLUS loans to help their children achieve their academic dreams. But before you sign on the dotted line, it’s crucial to understand the pros and cons of this financial commitment.
Diving into the Pros: Why PLUS Loans Might Be a Good Fit
1. Fixed Interest Rates: Unlike the variable rates of private loans, PLUS loans come with a fixed interest rate, offering predictability and peace of mind As of July 1, 2015, the interest rate for PLUS loans is 684%, which, while higher than the 4.29% rate for undergraduate direct loans, is still lower than many private lender offerings.
2. Flexible Repayment Options: Parents can choose from standard extended, or graduated repayment plans offering flexibility to fit different financial situations. These plans stretch the repayment period from 10 to 25 years, allowing for manageable monthly payments. Additionally, options like deferment and forbearance provide temporary relief if financial challenges arise.
3. Tax-Deductible Interest: The interest paid on PLUS loans can offer a tax break, potentially reducing your tax burden. Currently, you can deduct up to $2,500 or the total amount of interest paid, whichever is less. The deduction amount depends on your income, with full eligibility for single filers earning under $60,000 and married couples earning under $125,000.
Weighing the Cons: Potential Drawbacks of PLUS Loans
1. Unlimited Borrowing: Unlike other student loans, PLUS loans have no borrowing limit, allowing parents to take on more debt than they can handle. This can lead to long-term financial strain, impacting retirement savings and other financial goals. Carefully consider your financial situation and future needs before taking on a large debt burden.
2. No Grace Period: Unlike other student loans, PLUS loans require immediate repayment, with payments starting within 60 days of loan disbursement. This can be a significant financial strain, especially if your child is still enrolled full-time. Deferment options are available, but remember that interest continues to accrue during this period.
3. Default Dangers: Defaulting on a PLUS loan can have severe consequences, including wage garnishment, tax refund seizure, and legal action. Your credit score will also take a hit, impacting your ability to secure future loans and potentially increasing interest rates on other debts.
The Bottom Line: Making an Informed Decision
Taking on PLUS loans is a significant financial decision, requiring careful consideration of your financial situation and long-term goals. Weigh the pros and cons, assess your ability to handle the repayment burden, and explore alternative financing options before committing to a PLUS loan.
Seeking Expert Guidance: Navigating the Financial Maze
Managing college finances can be complex, and seeking professional guidance can be invaluable. Consider working with a financial advisor who can help you create a personalized plan, navigate the PLUS loan landscape, and make informed decisions that align with your financial goals.
Remember, taking on debt for your child’s education is a serious commitment. By understanding the pros and cons of PLUS loans, you can make an informed decision that aligns with your financial well-being and your child’s academic aspirations.
Alternatives to PLUS loans
PLUS loans arent your only options when it comes to borrowing for college. You have a few more options, such as a personal loan, securities-backed loan, or home equity line of credit. These options may offer more flexible loan terms or more appealing interest rates, depending on your financial circumstances.
But unlike a PLUS loan, these options usually don’t come with the possibility of a tax deduction for the interest or flexible repayment options like deferment or forgiveness.
Who claims parent PLUS loan on taxes?
FAQ
Are student loan payments tax deductible for parents?
What are the advantages of a parent PLUS loan?
Can I deduct student loan interest paid for my child?
Are parent PLUS loans included in debt relief?
Can I deduct student loan interest on a Parent PLUS loan?
Yes, the student loan interest, on a parent plus loan, is deductible since the loan was taken out when the student was your dependent. For additional information, see the following TurboTax Article: What is a 1098-E: Student Loan Interest. Please refer to the second paragraph under the ” When to deduct student loan interest ” heading.
Are PLUS loans tax deductible?
High interest rates: The rate on PLUS loans generally is higher than you might find from other borrowing options. (The current rate, which resets annually on July 1, is 7.54%.) That said, you may be able to deduct some of the interest from your taxable income. (See “Is it deductible?” below.)
How do I claim the Parent PLUS loan tax deduction?
Claiming the Parent PLUS Loan Tax Deduction is straightforward, allowing eligible borrowers and cosigners to reduce their taxable income. Here’s a step-by-step guide to ensure you qualify and know how to claim the student loan tax deduction: Step #1: Obtain Form 1098-E from Your Student Loan Servicer
Can I deduct interest paid on a Parent PLUS loan in 2023?
Interest Paid in 2023: Even with federal interest rates at 0%, you can still deduct any interest paid if you qualify. By understanding your eligibility and following these steps, you can confidently claim the Parent PLUS Loan Tax Deduction, potentially saving on your taxes and putting more money back in your pocket.