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Most student loan articles focus on struggling college graduates who can’t repay their debt. But what about their parents? We hardly ever hear about the moms and dads who are stuck paying back parent PLUS loans for children who obtained undergraduate degrees.
Parent PLUS loan debt currently stands at about $96.1 billion, spread out among 3.6 million borrowers. Since the standard parent PLUS repayment term is 10 years, millions of parents could spend a decade (or more) attempting to repay what they’ve borrowed.
Repayment could even be extended to 25 years if the loans get consolidated, or if the federal student loan balance in question exceeds $30,000. Even worse, these types of loans have the highest interest rates among the various types of federal student debt. For the 2018-19 school year, the rate is 7.6%, compared with 5.05% for direct loans to undergrads.
So what can parents do to ease the strain on their finances? Here are four ways to get your parent PLUS debt under control this year.
1. Income-contingent parent PLUS loan repayment plan
Pros: Lowers monthly payments and offers parent PLUS loan forgiveness after 25 years.
Cons: Likely increases total interest charges. Requires paying a higher percentage of discretionary income than other income-driven repayment plans.
The federal government offers four types of income-driven repayment plans, but parent PLUS loans are only eligible for one: Income-Contingent Repayment (ICR).
ICR caps monthly student loan payments at 20% of the borrower’s discretionary income, which is the difference between your gross income and a minimum level based on the federal poverty guideline for your state and family size.
Parents generally have to pay a larger chunk of their discretionary income with this program, but these payments can still be less than they’d be on other repayment plans. This is helpful if you hope to free up extra cash flow each month.
One advantage of ICR is that you’ll be eligible for parent PLUS loan forgiveness after you make payments for 25 years. However, spreading out parent PLUS loan repayment over such a long period can cost you more in interest overall. Plus, you might be subject to additional taxes on the amount forgiven.
To qualify for ICR, your parent PLUS loan needs to be consolidated first by the Department of Education into a direct consolidation loan. This is the standard federal student loan consolidation option.
To apply for a direct consolidation loan, first contact your student loan servicer. There are nine federal loan servicers:
- FedLoan Servicing
- Granite State
- Great Lakes Educational Loan Services, Inc
- OSLA Servicing
Your loan servicer should be able to advise you on the best way to proceed. Note that the federal consolidation process typically takes between 30 and 90 days.
2. Parent PLUS loan consolidation and refinancing
Pros: Could decrease high interest rates on parent PLUS loans.
Cons: Requires borrowers to qualify based on credit and income. Borrowers could also lose some flexibility afforded by federal student loans.
Parent PLUS loan refinancing has the potential to work especially well for some borrowers. In general, parents of college students have more established credit histories than graduates in their 20s. If you’re a parent with a high credit score, then you have a better chance of approval for student loan refinancing.
Lenders that refinance parent PLUS loans like to see steady income and employment history as well, which will increase your odds of being approved. Want to get a sense of whether you might qualify to refinance? Take our refinancing eligibility quiz:
Private student loans don’t have all the same repayment options that federal student loans do. Most lenders offer terms between five and 20 years, as well as the choice between a variable and fixed interest rate. But you probably won’t be able to put your loans on an income-driven plan, and only a few private lenders offer forbearance if you run into financial hardship.
Plus, you can change federal student loan repayment plans at any time, but this isn’t the case with private student loans. Once you complete refinancing, your only other option to change your repayment terms would be to refinance again.
Before you decide to refinance, you’ll want to determine whether a lower monthly payment and the interest savings are worth giving up some of the federal protections and forgiveness programs.
Refinancing parent PLUS loans includes another option: refinancing your parent PLUS loans into your child’s name. By doing this, your child becomes responsible for their debt, and you no longer need to make payments. It can take the pressure off you, especially if you have been struggling with parent PLUS loan repayment.
3. Public Service Loan Forgiveness (PSLF)
Pros: Eligible for parent PLUS loan forgiveness after 10 years.
Cons: Limited to certain career fields.
Public Service Loan Forgiveness (PSLF) is a federal program available to certain public service employees, such as those in government and nonprofit fields. This program forgives all federal student loan debt after 120 qualifying payments (typically 10 years).
Many graduates on track to take advantage of Public Service Loan Forgiveness do so with income-driven repayment plans. Just keep in mind that most of these plans aren’t available for parent PLUS loans. Instead, you’ll likely need to consolidate your loan with the federal government and use Income-Contingent Repayment — if you use the standard 10-year repayment plan, then your loan balance would be zero after 120 payments, with nothing left to forgive.
Before you shoot for PSLF, make sure you definitely qualify. Unfortunately, many PSLF applicants who worked in public service for 10 years and expected to receive loan forgiveness had their applications rejected because they didn’t meet all requirements or didn’t file the right paperwork each year.
You should also make sure extending your loan terms with ICR is worth the extra amount you’d pay on interest. If you can make extra payments instead, you could get out of debt years ahead of schedule, which could be a better option for some borrowers.
Besides making sure your loans are on the right repayment plan, keep an eye out for any administrative changes to PSLF. The program has come under fire from critics recently, with some Republican lawmakers recommending eliminating it altogether. While the program is functioning right now, it’s not guaranteed to last forever.
4. Standard Parent PLUS Loan repayment
Pros: Keeps the total loan cost down via repayment over 10 years.
Cons: Could be less affordable due to higher monthly payments.
If you’re paying off a parent PLUS loan, you’ll automatically be enrolled in the standard repayment plan, which involves a 10-year repayment term with fixed monthly payments. There’s nothing wrong with this option, as long as you can afford to make the monthly payments. Stay on track, and you’ll have the loans paid off in 10 years.
The problems with standard parent PLUS loan repayment only surface if you can’t afford to keep up with the bills. In such cases, consider pursuing another repayment option, such as ICR, instead of risking default.
It’s worth noting that graduated repayment and extended repayment plans are also available. However, these might not be preferable to ICR or other options. Extended repayment, for instance, adds more time and interest to your overall payment, but it doesn’t end in loan forgiveness. These plans could give you a lower monthly payment now, but the added interest costs could be pretty high.
Take control of your parent PLUS loans
Consider the choices above to determine which is the best fit for your plans and your income level. (And while we’re on the subject, don’t forget to check if you’re eligible for a student loan interest tax deduction.)
Overall, the best option for you will depend on your situation. But the right choice is typically the one that allows you to pay off your student loans as quickly as possible — with the lowest cost.
Rebecca Safier contributed to this report.