Repaying your child’s student loans while managing your own finances can be a tough balancing act.
If you’ve taken out a parent PLUS loan, it’s important to have a strategy in place for parent PLUS loan repayment. Or perhaps you want to help your child without cosigning a loan so that you have the flexibility to give when you can.
In this complete repayment guide, we’ll help you come up with a plan of action.
Set your parent PLUS loan repayment game plan
If you’re repaying parent PLUS loans, it’s important to brush up on the terms of the payment: You are responsible for 100% of the loan repayment — not your child. Should your child help out with the payments? Perhaps, but it’s not a requirement.
Unfortunately, parent PLUS loans can be tough to manage with their high interest rates and potentially high balances. PLUS loan borrowers are allowed to take out loan amounts equal to the cost of attendance, minus financial aid, which could mean a hefty balance. The interest rate for parent PLUS loan repayment is 7.6% for loans disbursed on or after July 1, 2018. Plus, there’s a loan fee of 4.248%.
If you have parent PLUS loans, list them out and compare them with your income and expenses. How much can you afford to put toward debt each month? You’ll want to pay off the student loans while saving for retirement. If the 10-year standard repayment plan isn’t feasible, consider your alternatives.
See if you’re eligible for flexible repayment or forgiveness
If you are having trouble paying back your parent PLUS loans, look into a different repayment plan. Unfortunately, parent PLUS loans aren’t eligible for income-based repayment or pay-as-you earn programs. There are, however, various parent PLUS loan forgiveness programs and repayment options.
For some of these options, you first need to apply for a direct consolidation loan. This lets you combine multiple loans into one with a single monthly payment and a weighted interest rate. More importantly, it allows you to be eligible for income-contingent repayment and Public Service Loan Forgiveness.
Apply for income-contingent repayment
This is the only income-driven repayment plan available for parent PLUS loan borrowers if they now have a direct consolidation loan. The plan:
- Offers a repayment period of 25 years
- Caps your monthly payments at the lesser of either 20% of your discretionary income, or what the payment would be on a fixed, 12-year plan, adjusted according to income
- Forgives loans after 25 years of repayment
It’s important to know that you may owe income tax on student loans that are forgiven.
The income-contingent repayment plan can be helpful if you were having trouble paying back parent PLUS loans. But you’ll pay more in interest and you could face a hefty tax bill.
Consider Public Service Loan Forgiveness
If you are now on an income-contingent repayment plan, you may be eligible for the Public Service Loan Forgiveness program. To be eligible, you must:
- Work full time for an eligible government agency or nonprofit organization
- Make 120 qualifying payments
Through this program, your loans will be forgiven after 10 years of repayment. Submit any required paperwork yearly and stay in touch with your loan servicer about your repayment options.
Refinance parent PLUS loans
Student loan refinancing can be a good option if you have parent PLUS loans. Through refinancing your student loans with a private lender, you merge all your loans into one and — ideally — receive a better interest rate.
Considering the high rates for PLUS loans, refinancing could save money and help pay off your loans much faster. Parent PLUS borrowers are often especially attractive candidates for refinancing as they might have a stronger credit profile and more income than new graduates.
Typically, refinancing companies want you to have a good credit score, stable employment and enough income to pay back your loans. However, when refinancing, you give up federal loan protections, such as payment plan flexibility and the option to pursue an income-driven plan. Depending on your situation, the benefits of refinancing may outweigh the costs.
Ask yourself how you want to help your child with loan repayment
Parent PLUS borrowers face the unique situation of paying for their child’s education while trying to manage their own retirement savings. Unfortunately, doing both can spread some borrowers thin.
Whether you have parent PLUS loans or you want to help your children pay back their loans, there are a variety of ways to help without compromising your retirement plans.
Understanding your options, having a plan in place and thinking of you and your child as partners in paying back the loan are ways to ensure that both of your financial futures are protected.
If you’re assisting your child with loan repayment, seek the best repayment option.
Become a cosigner
If your child has limited credit history, you could consider becoming a cosigner if they apply for student loan refinancing. Refinancing could save them money on interest. But if they don’t have a strong credit profile and have limited income, they may be rejected for refinancing.
Remember, though, that in this case you are legally responsible for your child’s debt if they can’t pay it back.
In some instances, cosigner release may be an option down the road. For example, Citizens Bank allows for cosigner release after 36 consecutive, on-time payments. The terms of cosigner release depend on the lender, but, typically, the borrower needs to prove they have made on-time payments and have sufficient income to pay back the loans on their own.
It may take some time to be eligible for cosigner release, so think carefully about taking on this responsibility. It’s also a good idea to have a discussion with your child about expectations. What happens if they miss a payment? If they can no longer afford payments due to job loss or another circumstance, are you willing — and able — to step up and make payments? Going through what ifs can help ensure there are no misunderstandings on either side.
Help without cosigning or getting a loan
If you want to help pay back your child’s student loans but don’t want to take out parent PLUS loans or be a cosigner, talk to them about it.
If you decide you want to help in this form, here are some questions to ask yourself:
- How much can you afford to put toward debt each month?
- Will this set you back from your own financial goals?
- Will you give money to your child or will you repay the loan servicer directly? You may be able to become an authorized payer on your child’s loan servicer account.
- How much are you willing to help out? For example, do you want to help out with half or cover all of it? Or help out just a little bit? It’s up to you.
- If you’re assisting as an authorized payer, what happens if your child gets a higher-paying job or you need more money than expected? Setting up informal monthly check-ins to see how your repayment process is going can keep both of you on the same page.
Once you’ve figured out how much you can afford to pay and how much you are willing to pay, talk to your child. It’s important to set expectations and have an understanding of each of your roles in the debt repayment process.
Important questions for parent PLUS borrowers to consider
Should you tap your retirement funds to pay off your child’s loan debt?
If you want to help your child pay off their student loans, you may have considered tapping your retirement funds. But is this a good idea? Not really.
If you have the money, using retirement funds to help your child become debt-free might feel like the right thing to do. But it would be at the cost of your own financial future.
First, your child hopefully has many working, productive years ahead. They have a chance of turning their financial life around and could have the luxury of decades to pay off their loans. On the other hand, you can’t borrow money for retirement.
You will also be hit with penalties if you withdraw your retirement money early. For example, if you withdraw from your 401(k) before you’re 59 1/2, you’ll pay a 10% withdrawal penalty, in addition to federal and state income taxes.
The same goes for withdrawing funds from a traditional individual retirement account (IRA). Going this route could take a huge chunk out of our nest egg that could cost more than years of interest on your child’s loan.
A Roth IRA is a bit more flexible than other retirement vehicles. If you withdraw funds from a Roth IRA, you can do so without any penalties, but you may pay a tax depending on the purpose of the withdrawal.
Regardless, it’s not a good idea to withdraw your own retirement funds to pay off your children’s debt. If you think you have the funds to pay off your child’s debt and comfortably afford retirement, you could consider speaking with your financial advisor about that goal.
Can you gift money to help pay off your child’s student loans?
One way you can help your children pay off their student loans is by gifting them money to make payments. You’ll want to be clear that the money is used for student loan repayment and nothing else.
You can gift small amounts for birthdays and holidays, as well as if you get a tax refund. If you’re looking at gifting a sizable amount, though, be aware of the gift tax. You can gift up to $15,000 without any issues, but if you go over that amount, your gift will count as part of your annual exclusion. You’ll have to file a return and fill out Form 709 with the IRS. The good news? You’ll only be hit with a gift tax after you reach your lifetime limit of $11.4 million.
There’s some confusion as parents can avoid the gift tax by making applicable payments for higher education, such as tuition, directly to the university. However, current tax code doesn’t consider student loan payments as part of those qualified expenses.
Can you pay off a parent PLUS loan early?
Perhaps you came into a financial windfall from an inheritance or sold your family home, and are wondering: Can you pay off a parent PLUS loan early?
All federal student loans allow for penalty-free prepayment. But Is this a good idea? That depends.
Remember: There is no borrowing for retirement. It may make sense to use those extra funds to pad your nest egg and continue making scheduled payments, rather than wipe out the balance. A financial advisor can be helpful in discussing the pros and cons of your options.
Don’t lose sight of your financial goals to help your child
You want the world for your child. But in many cases, the best thing you can do is ensure that your own financial future is as healthy as possible. You don’t want your child to have to worry about your finances if you run out of retirement funds.
Taking care of your own funds isn’t being selfish. It’s being smart, and it’s also teaching your adult child self-reliance. Helping your child by taking out parent PLUS loans can be a huge gift to your children, but make sure you are realistic about your own financial needs.
Melanie Lockert contributed to this article.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.47% APR (with Auto Pay) to 7.59% APR (with Auto Pay). Variable rate loan rates range from 2.27% APR (with Auto Pay) to 6.89% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of August 15, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/15/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for SoFi.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.37% effective July 10, 2019.
5 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.27% – 6.89%1|
|2.27% – 7.75%2|
|2.43% – 6.65%3|
|2.37% – 7.95%4|
|2.46% – 9.24%5|