Parents and Paying Off Parent PLUS Loans

Parents nationwide struggle with the burden of sending their children to college.  In recent years, more parents have turned to Parent PLUS Loans in an attempt to bridge the gap.

This article will explore:

A father and his two children

What are Parent PLUS loans?

 

Parent PLUS loans are an unsubsidized type of federal student loan that parents can take out to help finance their children's college education.  They are part of the U.S. Department of Education's Direct PLUS loan program, and are only available to a dependent's legal guardians.

These loans currently hold an interest rate of 6.28% for disbursement dates between July 1, 2021 and July 1, 2022.  This rate, higher than that of other federal student loan types, accounts for the fact that this loan type was not intended to be a family's primary way of financing a college education.

Unfortunately, this can lead to default, which is disastrous, as the government may garnish your wages.

An interesting part of the Parent PLUS loan program is that you can borrow up to the entire amount you need to cover a child's education.  Plus, they still carry more flexibility than the majority of private loan options out there, so it is easy to see the draw.

 

Do you already have parent loans?  Our student loan calculator will help you make the progress you want to see.

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Parent PLUS loan eligibility

There are certain eligibility criteria that you must meet in order to be considered to take out parent loans for a child.  Below are some of the basic requirements you should be aware of.

  1. You need to be the biological or adoptive parent of a college student (legal guardian)

  2. You and your child need to be eligible for federal student loans.

  3. Your child needs to attend a college or university that is recognized by the direct loan program and needs to be enrolled half-time (at a minimum).

  4. You cannot be in default of any other outstanding student loans.

A credit score will also be conducted before the funds are disbursed.  To pass the credit check, you must not have:

  • Any active delinquency of 90 days or longer

  • Bankruptcies within past 5 years

  • Foreclosures within past 5 years

Applying for Parent PLUS loans

 

After verifying eligibility, those interested in taking on direct parent loans for their children will undertake the following process.

  1. Complete the Free Application for Federal Student Aid (FAFSA)

  2. Figure out how much you need to borrow

  3. Complete the Parent PLUS loan application

  4. Sign and complete your promissory note

A college graduation ceremony

Repaying Parent PLUS loans

 

Repaying Parent PLUS loans works differently than traditional student loan repayment.  For one, the path to repayment carries eligibility to fewer options. 

 

For example, of the four income-driven repayment plans, the only option for parent loans is income contingent repayment.  Your other options to pay off these loans include:

  1. Refinancing (either into your name or your child's)

  2. Federal Consolidation

  3. Pursuing Parent PLUS loan forgiveness

  4. Graduated or Extended Repayment

1. Refinancing your Parent PLUS loans

You have two options if you decide to refinance your loans.  You can either:

  • Refinance the loans into your child's name

  • Refinance the loans into your name

Private lenders like CommonBondSoFi, Earnest, and ELFI allow you to refinance the loans into your child's name, absolving you of the financial responsibility of paying for them.

Even if your child was paying you to make the loan payment per month, this approach may make a lot more sense.  This is because you'll likely be able to save a lot of money by securing a lower interest rate. 

 

This is a really personal decision that needs to be made between you and your child, and you should be sure that they are able to handle the responsibility that comes with these monthly payments.

Remember to refinance using our special links below to receive a bonus from your new lender (except for Earnest, which is just a standard link).

Refinancing into your name

The other option is to refinance your parent loans, but keep them in your name.  This is more standard than transitioning them into your child's name, meaning that most every private lender out there will be able to help you do this.

Balancing refinancing with preparing for retirement

The main danger of refinancing Parent PLUS debt into your name only is the effect your debt may have on your ultimate retirement plans.

By virtue of having children that are in or have finished college, you are likely towards the back end of your career.  In instances like these, it is critically important that you make as much progress towards your debt as possible before you refinance.

As a general rule of thumb, you'll want to consider the following if you are in your 50s or 60s with parent (or your own) student loan debt:

  • Do not choose a new term or interest rate that will cause you to stop saving for retirement or be making student loan payments in retirement

  • Pick the shortest term possible that will allow you to pay off debt and invest at the same time

  • Run the cost benefit analysis to understand what the best option is for you

More: Creative ways to pay off your loans quickly

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2. Consolidating Parent PLUS loans

You can also use federal consolidation strategically as a way to make progress on your debt, either by using it as a repayment strategy, or using it as an intermediary step to make work towards another strategy, like income contingent repayment.

The consolidation of Parent PLUS loans can be helpful, but you need to know that parent loans cannot be consolidated with any outstanding federal loans that your child has.

But if you're struggling to keep up with the payments and decide not to refinance, consolidation can be an option to increase your monthly cash flow.  Remember that consolidation will not help lower your interest rate though.

Also, keep in mind though that, depending on the balance of your PLUS loan, your new term could be as long as 30 years, something you'll need to keep in mind if you're considering retirement.

Of course, the other benefit to consolidation your Parent PLUS loans is that your new Direct Consolidation Loan can open you up to student loan forgiveness opportunities like income-contingent repayment and PSLF.  More on this in a minute.

3. Parent PLUS loans and student loan forgiveness

 

Those with Parent PLUS loans should not count on student loan forgiveness.  At this time, the only feasible options for Parent PLUS loan forgiveness are:

  • Income Contingent Repayment

  • Public Service Loan Forgiveness

Income-Contingent Repayment with Parent PLUS loans

At this time, the only income-driven repayment plan for parent borrowers is income-contingent repayment, widely agreed upon to be the least beneficial of the four IDR plans.  But you can use ICR without qualifying for or pursuing PSLF.

Income contingent repayment generally requires you to pay the lesser of:

 

  • 20% of your discretionary income

  • The amount you'd pay on a hypothetical 12-year fixed payment plan

 After 25 years of making these payments, you'll gain eligibility for student loan forgiveness, and even then, your forgiveness may be taxable.

But remember - to use ICR, you still will need to consolidate first.

Parent PLUS loans and PSLF

Here is some good news.  For those parents working in public service roles, Public Service Loan Forgiveness is an option, as long as the program's eligibility requirements are met.  Generally, Parent PLUS loans need to meet the following requirements to qualify:

  1. Be a part of the Direct Loan program or included in a Federal Consolidation Loan

  2. Work in a qualifying public service role

  3. Be on an appropriate repayment plan

Parent PLUS loans do not qualify for the temporary PSLF waiver, however, which is scheduled to end on October 31, 2022.

Of course, you'll still need to be on a qualifying repayment plan, just like your child would need to be to pursue PSLF.  The main difference is that the only qualifying repayment plan, other than Standard (which you can't use the entire time or there would be nothing left to forgive), is income contingent repayment.

But to even take advantage of this, you'll need to consolidate via a consolidation loan first.

After consolidation, you'll become eligible for forgiveness once you:

  • Make 120 monthly payments within the Direct Loan program

  • Within a qualifying repayment plan

  • While employed in a PSLF eligible public service job

We've also written extensively on the topic of PSLF eligibility.  If you're still unsure what your best course of action is, feel free to schedule your student debt consult with us.  We're experts in crafting unique student loan repayment strategies.

Download our student loan calculator

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Other ways to pay off your parent student loans

Other than standard repayment, refinancing, consolidation, or forgiveness, your only other real option would be student loan discharge, which can be accomplished via a few different approaches.

Parent PLUS student loan discharge

Though not ideal, these loans may also be eligible for discharge in the following situations:

  • Your death (if you hold the loans)

  • Total and permanent disability

  • Closure of your child's school before program completion

  • You were ineligible to receive the loan to begin with

  • You declare bankruptcy (very rare)

  • A few other rare scenarios

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