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 repaying Parent PLUS Loans for children who obtained undergraduate degrees.
Parent PLUS loan debt currently stands at about $77.8 billion. Since the standard Parent PLUS repayment term is 10 years, millions of parents could spend a decade attempting to repay what they’ve borrowed. Repayment could even be extended to 30 years when loans are consolidated, or if the loan balance tops $30,000 in federal student loans. Even worse, these types of loans have the highest interest rates among all federal student loans. For the 2017-18 school year, the rate is 7.0%, and older Parent PLUS loans could have rates above 7%.
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 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 percent of the borrower’s discretionary income. Keep in mind that discretionary income is usually less than gross income earned.
Parents generally have to pay a larger chunk of their discretionary income with this plan, but these payments can still be less than the other options. This is helpful if you hope to free up some 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 also 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, you should contact your student loan servicer. There are nine federal loan servicer:
- FedLoan Servicing
- Granite State
- Great Lakes Educational Loan Services, Inc
- OSLA Servicing
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 of the same repayment options that federal student loans do. While you can change federal student loan repayment plans at any time, this isn’t the case with private student loans. Once you complete refinancing, your only other option is to refinance again if you want to change your repayment terms.
You need to determine whether a lower monthly payment and the interest savings are worth giving up some of the federal protections. Many parents choose to refinance Parent PLUS loans to improve their finances so they can rescue their retirement.
Refinancing Parent PLUS loans includes another option: refinancing your Parent PLUS loans into your child’s name. With this option, 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 nonprofits 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.
Before you shoot for PSLF, make sure you qualify. All of the rules that apply to other federal student loans typically apply to Parent PLUS loans as well.
As with any loan for which you plan to take advantage of loan forgiveness, make sure that your strategy is a smart one. It’s possible that you might not have much or any debt left to forgive after the repayment period. This can do more harm than good if you pay a bunch of extra interest yet receive nothing in return.
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. 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 make payments. In such cases, consider pursuing another repayment option instead of risking default.
It’s worth noting that graduated repayment and extended repayment options are also available. However, these often aren’t preferable to the other options listed here. They generally add more time and interest to your overall repayment. You can get a lower monthly payment now, but the added interest costs are generally high.
Take control of your Parent PLUS loans
No matter which repayment method you choose, all student loans are eligible for a student loan interest tax deduction of up to $2,500. However, since this deduction is subject to several rules (including income caps), consider consulting with a tax professional to make sure you qualify.
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.