Increasingly, student loan debt is following consumers into their golden years and potentially putting their retirement at risk. Student loan borrowers approaching retirement have less saved than their student-loan-free counterparts, according to a 2017 study by the Consumer Financial Protection Bureau (CFPB).
The majority of older borrowers’ loans were taken out to pay for their children’s educations, according to the CFPB. So one way to rescue your retirement is to refinance your Parent PLUS loans or transfer them to your child. The parents of the Class of 2018 college students took out an average of $35,600 in federal Parent PLUS loans on behalf of their children, according to student loan debt statistics. Refinancing could significantly reduce the cost of such loans if you qualify.
Try these steps to use Parent PLUS loan refinancing to shift your financial priorities toward retirement as you age:
- Refinance Parent PLUS loans to get retirement savings back on track
- Invest the savings from refinancing a Parent PLUS loan
- Transfer Parent PLUS loans to your child
- Don’t wait — make your retirement plan now
When you refinance Parent PLUS loans, you replace them with a new loan. The advantage to refinancing is that you might be able to get a lower interest rate — and potentially a lower monthly payment — freeing up additional income to go toward retirement. You can use our student loan refinancing calculator to see exactly how much money you might save.
Depending on the year the funds were disbursed, you could be paying interest as high as 8.5% on Parent PLUS loans. When you refinance the loans, you could be eligible for a much lower rate, based on your credit profile and income.
For example, if you owe $35,000 at 7.08% for 10 more years, dropping your rate to 3.49% and extending the loan term can save you money over time:
In this scenario, your monthly payments would extend by an additional five years. However, you’d save almost $4,000 in interest and your monthly payment would drop by $158. If you’re comfortable spreading out your payments over a longer time horizon, you’ll improve your cash flow each month and save on interest overall.
Exploring the best banks for refinancing student loans can help determine if you’ll receive better terms on your loans. If you free up extra cash by refinancing and add breathing room to your budget, you can bank that money to start catching up on retirement savings.
After refinancing a Parent PLUS loan, you can put those savings to work for you. Let’s say you currently have $300,000 saved for retirement. You know that’s not enough to retire on, but student loan payments make it difficult to save more on your budget.
If you invest the $158 you save by refinancing your Parent PLUS loans at an average annual return of 7% for the next 15 years, you’ll have close to $1 million in your account by the time you pay off the loan.
More than half of that amount will be money you earned thanks to compounding interest, which is why it’s important to get started as soon as possible. If you have a tax-advantaged retirement plan, use it to bolster your nest egg. The tax benefits can help your money grow faster.
By refinancing a Parent PLUS loan, you could save money on your loans and build your wealth at the same time.
The only way to transfer a Parent PLUS loan to the student whose education you helped finance is by refinancing the oan under the child’s name. Doing this will transition your Parent PLUS loans to your child, which means your child is responsible for his or her own debt. It also frees you from making payments so you can focus on retirement savings.
Many lenders that refinance student loans offer this option. In this situation, the lender will consider your child’s financial profile rather than yours. If she’s older now and have been working for several years, she’s likely in a better position to repay the loan, and might even be in a better position than you to qualify for lower interest rates.
If you decide not to transfer your Parent PLUS loans to your child, or if he doesn’t qualify for refinancing a Parent PLUS loan, talk to him about contributing to your monthly payments. Even if your child makes partial payments, that can relieve some of the pressure on your budget.
Also, if you are a cosigner, it’s possible to get a cosigner release in some cases. That, at least, relieves you from being responsible for the loan if your child is unable to pay it back.
If you have good credit and you haven’t retired yet, consider refinancing your Parent PLUS loans to a lower rate that saves you money. If your child has good credit and a stable income, it might be better to transfer your Parent PLUS loan to the student.
Now is the time to look at where you stand — and how your Parent PLUS loan could be slowing you down. No matter which direction you choose to go in, it’s never too late to save more for retirement.
Elizabeth Aldrich contributed to this report.