How to Rescue Your Retirement By Refinancing a Parent PLUS Loan

federal direct parent plus loan

More and more, student loan debt is following consumers into their golden years. Our recent Student Loans for Parents survey found that 55 percent of parents repaying student debt have more than $40,000 in student loans.

According to a recent report from the Consumer Financial Protection Bureau (CFPB), the number of older student loan borrowers has quadrupled since 2005.

Many of these borrowers aren’t paying off their own education debt, though. The CFPB reports that the majority of student loan debt is due to a child’s education. Plus, over half of cosigners on student loans are age 55 and older.

If you’re one of these older Americans with student debt, there’s a good chance you have a Federal Direct Parent PLUS loan. And, unfortunately, that federal parent loan might be putting your retirement at risk. Depending on your situation, you might be able to rescue your retirement by refinancing Parent PLUS loans.

How older consumers are impacted by Parent PLUS loans

The CFPB report indicates that nearly 40 percent of older federal student loan borrowers are in default. This isn’t surprising when about 39 percent of parents repay these student loans without help from their children.

It’s not just about getting help making payments on Parent PLUS loans. The fact that some of your income has been going toward paying on a child’s or grandchild’s student debt means that retirement probably hasn’t been the highest priority. The CFPB reports that borrowers approaching retirement have less saved than their counterparts.

As you near retirement, it’s vital that you do what you can to rescue your retirement. One way to get back on track is to refinance your Parent PLUS loans.

Refinance your federal parent loan

When you refinance your Federal Direct Parent PLUS loan, you replace it with a new loan. The advantage to refinancing is that you might be able to get a lower interest rate — and a lower monthly payment.

Depending on when the funds were disbursed, you might be paying an interest rate as high as 8.5%. When you refinance your Parent PLUS loans, you could be eligible for a much lower rate.

If you owe $35,000 at 6.8% for 10 more years, dropping your rate to 3.2% and extending the loan term can save you money over time:
plus loans

It’s true that in this scenario, you end up with your federal parent loan for five more years. However, you save more than $4,000 in interest, and your monthly payment drops by $158.

If you’re comfortable spreading the payments out for a longer period of time, you can improve your cash flow each month. At the same time, you save overall on interest. Now that you have these savings each month, it’s time to bank that money to start catching up with retirement.

Invest the savings from refinancing

After you refinance your Parent PLUS loans, you can put those savings to work for you. Let’s say you have saved $300,000 for retirement up to this point. You know that’s not enough to retire on, but the student loan payments are sucking everything out of your budget.

If you take the $158 you save by refinancing your student loans and invest it at an average annual return of seven percent for the next 15 years, you can supercharge your retirement savings.
federal parent loan

If you have a tax-advantaged retirement plan, use it to bolster your nest egg. The tax advantages help your money grow faster. Plus, when you pay off the loan in 15 years, you should have close to $1 million in your retirement account. You save money on your loans and build your wealth at the same time.

Refinance your Federal Direct Parent PLUS loan in your child’s name

Another solution is to transition your Parent PLUS loans to your child. There are lenders that will help you refinance your federal parent loan in your child’s name. That means your child is responsible for their own debt, and that frees you up to rescue your retirement.

If you don’t refinance, talk to your child about paying some of the loan each month. Even if your child makes partial payments, that can relieve some of the pressure on your budget.

If you are a cosigner, it’s possible to get a cosigner release in some cases. That, at least, gets you out of being responsible for the loan if your child defaults. You don’t want your child to tank your credit just ahead of retirement, especially if you plan to refinance.

Don’t wait — make your retirement plan now

Don’t let student loans ruin your retirement. Now is the time to look at where you stand — and how your federal parent loan is slowing you down.

If you have good credit and you haven’t retired yet, you might be able to refinance your Federal Direct Parent PLUS loan to a lower rate that saves you money. Once you free up cash flow, you should have more breathing room in your budget. Plus, you will have more money to invest so you can catch up with your retirement and come out ahead.

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