THE BLOG
10/01/2016 01:01 pm ET Updated Oct 02, 2017

Parents Plus Loans -- Trap for the Unwary

It is easy to get lost in the maze of regulations governing federal student loans. Parents Plus loans can be particularly daunting because many parents have FFEL Parents Plus loans which automatically disqualify them from the most favorable repayment plans. When parents with FFEL Parents Plus loans ask a collector about payment options, in my experience they are never told about a simple switch that could drastically lower their payment.

I had one client who consulted me after amassing $353,000 in Parents Plus loans putting his children through school. For whatever reason, his children were unable or unwilling to help with payment of the student loan debt. The loans were at 7.3.% interest rate. Since the government lends big banks money at close to a 0% interest rate which they lend back to us at a much higher rate, this is hardly a level playing field, but that's an issue for another day. My client was close to retirement on a fixed income. The lowest payment options offered were: (1) a payment of $2,493 per month for 30 years for a total of $897,321; (2) or a graduated repayment plan starting at $2,212 per month escalating to $3,164 per month over 30 years that would and pay a total of $958,171. The collector did not seem concerned whether these were viable options but my client knew defaulting on the loans would just lead to the government garnishing 15% of his social security check. He wanted to pay it back, but needed someone who would work with him. What the collector did not but could have told him was that he could consolidate his FFEL Parents Plus loans into a Direct Parents Plus loan and lower his payment dramatically. After consolidating his loan with Great Lakes, he was told his payment would be $750 per month because he now qualified for the Income Contingent Repayment plan ("ICR"). The Department of Education has a fiduciary duty to its borrowers if only as taxpayers to require its collectors to be more proactive.

So what do you do if you have Parents Plus loans but you're not sure what type they are?

(1) Go to the National Student Loan Data System, and sign up. The first page will tell you what type of Parents Plus loans you have.

(2) Avoid a default if at all possible. Default means you are 270 days behind in your payments. You're not eligible for a repayment plan as long as you remain in default.

(3) There is a student loan calculator at the Department of Education's website that can give you some idea what your payment might be under ICR.

(4) You need to be careful in consolidating student loans. If you include certain type of loans such as Stafford within a consolidation, you may disqualify yourself from even more favorable repayment plans than ICR such as IBR and REPAYEE.

The above is not intended as legal advice for your particular situation. Questions should be addressed to student loan attorneys admitted to practice within your state. Richard Gaudreau is a lawyer admitted to practice in New Hampshire (NH) and Massachusetts (Ma) with a specialty in bankruptcy and student loans. He has litigated student loan issues in the U.S. Bankruptcy Court, First Circuit Bankruptcy Appellate Panel, and Federal First Circuit Court of Appeals. He may be reached through his website at attorneygaudreau.com, by email at Richard@attorneygaudreau.com, or by calling 603-893-4300