The Parent PLUS loan apocalypse that might put your retirement savings at risk

With recent changes to student federal loan limits in President Donald Trump’s One Big Beautiful Bill Act (OBBB), many families are having hard conversations about how to pay for their children’s higher education.

Increasingly, it means parents might be putting their retirement savings at risk or finding other avenues to come up with the money to help their adult children pay for college.

In 2024-2025, the average in-state, four-year public university costs roughly $30,000 per year for all expenses, according to College Board.

A student can borrow $5,500 in federal loans their freshman year. But under the Trump administration’s new rules, parents are limited to borrowing $20,000 annually with federal Parent PLUS loans, or $65,000 total per student. Previously, parents could borrow up to the full cost of attendance, minus other aid.

That leaves a roughly $4,500 gap for families to pay — and that’s just the first year of school.

“Most clients are still digesting this,” said Ken Couser, director of financial planning at Janney Montgomery Scott, a Philadelphia-area financial planning firm. “I don’t think it has hit the mainstream as of yet.”

‘One Big Beautiful Bill’ student loan caps explained

More than 3.6 million Parent PLUS borrowers have more than $110.3 billion in outstanding debt, according to Federal Student Aid data for 2024.

The OBBB, signed into law on July 4, scaled back the program with the new limits. The bill also eliminates the Grad Parent PLUS loan program entirely for graduate school and requires students to max out their federal Direct loans before parents can apply and qualify for Parent PLUS loans.

The new federal loan limits also caps borrowing for master’s and most doctoral degree programs at $20,500 per year and $100,000 in total; professional practice doctoral degrees, such as medicine and law, will have higher limits of $50,000 annually and a $200,000 lifetime cap. Currently, most of the students in these programs, particularly in medicine, law and dentistry, borrow amounts that exceed what the new federal limits allow, according to an analysis from the Urban Institute.

Combined, these changes could put parents in a tougher spot to help their children pay for college. To ease the strain, they’re looking at other means — their retirement savings, home equity and private loans — to make up the gap in federal student loan financing.

Middle-class families will feel the squeeze the most. These households earn too much to qualify for need-based aid but not enough to pay college costs out of pocket.

The numbers underscore how dire student loan debt has become in the U.S., with 42.5 million borrowers collectively owing a jaw-dropping $1.8 trillion in federal and private student loans as of the second quarter of 2025, according to the latest data from the Federal Reserve. Meanwhile, the average borrower with undergraduate federal student loan debt owes $29,300, College Board data shows.

Nearly half of American families (48%) said they borrowed money to help pay for college in 2025, according to Sallie Mae’s How America Pays for College survey. Roughly six in 10 families (59%) believe the availability of federal student loans have increased college costs, and 35% of borrowers said access to these loans allowed them to consider more expensive schools.

The survey, which was conducted by Ipsos in the spring among 1,000 undergraduate students and 1,000 parents of undergraduates, found that 42% of families with federal student loans expect their loans to be forgiven.

However, Trump’s new tax bill includes a rule that taxes federal student loan forgiveness as income beginning in 2026 where it was previously tax-free. This will result in a tax bomb for those borrowers.

Additionally, the U.S. Department of Education recently announced it will limit which employers and organizations qualify for the Public Service Loan Forgiveness (PSLF) program, making it harder for students to access PSLF.

Parents look to home equity, retirement savings to bridge gap

According to Salle Mae’s survey, nearly three-quarters (74%) of undergraduate families used parent income and savings to help pay for college in the 2024-2025 academic year, contributing an average of $15,754. Of that share, 17% of families tapped retirement savings.

And that trend has financial planners like Couser worried.

“I would not recommend individuals take from a 401(k) account, even though that's where the majority of their assets would be to pay for their children's education,” Couser said.

The risks of 401(k) loans are significant. Parents can typically borrow up to 50% of their account value, but "you're missing out on full potential growth of that money. If the markets are up eight, 10% you're only paying yourself back, whatever the interest of that loan would be," Couser said.

Worse still, if parents leave their job and the loan hasn’t been repaid in full, the IRS looks at it as a distribution, which triggers taxes and penalties for those under 59½, Couser noted.

Home equity presents another tempting but risky option to pay for college. Many families built substantial equity during the pandemic housing boom, but tapping it means disturbing historically low mortgage rates at 2% or 3% for today's higher rates near the 7% mark for cash-out refinancing. A home equity loan or line of credit are also options. These second mortgages allow you to tap your home’s equity and maintain your first mortgage rate, but you’ll pay higher rates (around 8% for HELOCs), and the loan terms last for up to 30 years, in addition to your primary mortgage.

"Your home is your home, and if you miss payments, you're potentially putting yourself at a lot of harm there," Couser warned, noting that defaulting on any home loans puts your property at risk of foreclosure. "From a securities perspective, if you have the value in your securities, and you're able to take out the loans from your securities. There’s a lot less of a potential risk there.”

Other ways to help your student pay for school

If your kids are young, Couser recommends opening a 529 account to start saving for college. If you have other brokerage accounts, you’ll pay capital gains on any withdrawal you make, he noted.

Sara Parrish, president of CampusDoor, a third-party student loan origination platform, sees families increasingly caught in this squeeze. Private student loans can help in some cases, but they may be harder for parents to qualify for due to stringent debt-to-income (DTI) ratio and credit score requirements.

"We are seeing some lenders preparing to come to market with products that do allow them to go a little deeper from a FICO perspective and go a little higher, from a DTI perspective,” Parrish said. The hope, she added, is that families that were relying on Parent PLUS loans have additional borrowing options.

Experts still stress that families should exhaust all federal borrowing options first by filling out the Free Application for Federal Student Aid (FAFSA) to see what aid they qualify for. Students should also apply for as many scholarships and grants as possible.
Beyond that, anything else is gap financing, Parrish said.

"Federal programs tend to have more income-based repayment options available. That's a little bit more rare on the private side," Parrish said. "Most private programs have death and disability protections baked in. And of course, the federal programs do, too.”

For many families, the Trump administration’s new rules on federal student borrowing will require earlier planning. Since it’s unlikely that colleges will lower tuition and costs, families have to be realistic about how much debt they should take on to pay for school relative to their degree’s return on investment, Couser said.

“Private versus public, liberal arts versus X…all these things come into consideration, and you have to be realistic about what you can accomplish,” Couser said. “I don't think any parent, any child, wants to come out of the college years in a worse situation than what they started.”

If you still have time to plan, this is the perfect time to have a conversation with your financial advisor to understand the new changes — and how it’ll impact your financial picture, he added.
“Get a better understanding of what you do have available and what you're willing to do, and what it would potentially do for [your finances] in the long term.”