As student loans increasingly aren’t enough to cover the cost of a college education, parents are picking up the rest of the tab with loans of their own — and sometimes finding that they can’t pay Parent PLUS loans back.
According to 2018 research from the Brookings Institute, at least 3.4 million parent borrowers owe $87 billion in federal Parent PLUS loans, a common loan option that parents use to fund college costs. That’s an average of more than $25,000 in student debt per parent.
Currently, Parent PLUS loans come with a 7.08% interest rate (2019-2020 school year) — the highest interest rate among federal student loans today. This is why many parents struggle with Parent PLUS loan repayment. If you’re having a hard time repaying Parent PLUS loans, here are some options to consider.
1. Enroll in income-driven repayment
2. Sign up for an alternative repayment plan
3. Find out if you’re eligible for loan forgiveness
4. Refinance the federal Parent PLUS loan in your child’s name
5. Ask your child to help out
6. Consider deferment or forbearance
Managing Parent PLUS loans
If you’re struggling with federal student loan payments, you can sign up for an income-driven repayment (IDR) plan. Under these plans, the government extends your repayment term and caps your monthly payments to a percentage of your discretionary income.
There are four types of IDR plans for federal student loans, but if you have Parent PLUS loans, you have only one option: Income-Contingent Repayment (ICR).
Under this plan, your lender sets your payments at 20% of your income. Your repayment term can be as long as 25 years. Although you’ll pay more in interest over time, this repayment plan can make your monthly payments more manageable.
If you still have a balance on your loans after making payments under an ICR plan for 25 years, the government will discharge the remaining amount. However, the forgiven amount is taxable as income, so it’s important to plan ahead so you’re not surprised by a large tax bill.
To get on an ICR plan, the government requires you to first consolidate your federal Parent PLUS loan into a Direct Consolidation loan and then repay the loan under the ICR plan. To start, apply for a consolidation loan online.
If you first want to see if an Income-Contingent Repayment could benefit you, use our calculator.
A federal Parent PLUS loan is eligible for other repayment plans outside of ICR. If you need some more breathing room in your budget, consider these alternatives:
- Graduated Repayment Plan: With a Graduated Repayment Plan, your payments start out lower and then increase every two years. The repayment term lasts for up to 10 years. This could be a helpful option if you have a low income now but expect it to increase in the future.
- Extended Repayment Plan: Under an Extended Repayment Plan, your payment term is extended to up to 25 years, reducing your monthly payments. To qualify, you must have at least $30,000 in outstanding Parent PLUS loans.
Keep in mind that you will pay more in interest over time with these alternative repayment options, though they can reduce your monthly bill so you have more breathing room.
While many people think that Parent PLUS loan forgiveness isn’t an option, that’s untrue. A parent might qualify for Public Service Loan Forgiveness (PSLF) if they work for an eligible nonprofit organization or government agency for 10 years.
After 10 years of making qualifying payments, the government will forgive the parent’s remaining loan balance. Unlike other forms of forgiveness, any amount that is forgiven under PSLF is not taxable as income.
This option might not be right for everyone; be sure to educate yourself on the full requirements before pursuing this program.
If you’ve reached a point where you can’t pay your Parent PLUS loan or are approaching retirement, you might want to consider refinancing the loans into your kid’s name.
If your child is gainfully employed and has a good credit score, they can work with a private lender to refinance the debt, taking out a new loan to pay off the Parent PLUS loan. They might qualify for a lower interest rate, a longer repayment term or a reduced monthly payment by refinancing.
This approach makes your child solely responsible for repaying the debt. You’ll no longer make payments on the loans, so you can focus on your other financial goals.
In some cases, you may find that refinancing your Parent PLUS loan is worthwhile even if your name needs to stay on the loan. There are some banks that offer refinancing specifically for parent borrowers, and parents may get a better interest rate through refinancing, which could allow you to save a significant amount of money over the life of the loan.
In the government’s eyes, you are responsible for repaying Parent PLUS loans. The government cannot force your child to make payments on your behalf. But if you’re having trouble keeping up with your payments, it might be worth talking with your child.
Even if you don’t formally refinance the loans in your child’s name, you can sit down and explain your financial concerns. Work together to come up with a way for your child to help with the payments, such as covering 50% of the monthly bill. That way, you can get some relief while still helping your child in the early stages of their career.
In certain situations, you can enter your loans into deferment or forbearance. That means you can temporarily stop making payments without becoming delinquent on your debt.
Parent PLUS loan deferment or forbearance may be an option in the following situations:
- If you or the student for whom you took out a Parent PLUS loan is enrolled at least half-time at an eligible school
- If you are unemployed or facing significant financial hardship
- If you are serving on active duty in the U.S. armed forces
- If you are serving in the Peace Corps
- If you are in a full-time rehabilitation training program for people with disabilities
The amount of deferment or forbearance you receive for your payments depends on your situation. Interest generally will continue to accrue on the loans, though with deferment on some types of loans you may not be responsible for paying the interest that accrues. Still, deferment or forbearance can give you time to get back on your feet.
If you feel overwhelmed and worry that you can’t pay Parent PLUS loans, know that there are options available that can help. From refinancing your debt to signing up for an Income-Contingent Repayment plan, you can find ways to make your payments more manageable.
For more information on helping your kids pay for college, read up on these tips.
Marty Minchin contributed to this report.