As a parent, you want the best for your children; you try to help them out as much as you can. In some cases, this might mean helping them afford school with a Parent PLUS loan. Perhaps you’re helping them pay off their own student loans.
Repaying your children’s student loans while managing your own finances can be a tough balancing act as you near retirement. In this guide, we’ll help you come up with a plan of action, so you can successfully pay off those student loans.
Your Parent PLUS Loan Repayment Game Plan
If you’re repaying Parent PLUS loans, you are legally responsible for 100 percent of the loan repayment — not your child. Should they help out with the payments? Perhaps, but they don’t have to.
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. Rates currently sit at 6.84% for the 2015-2016 school year.
If you have Parent PLUS loans, list them all out and compare with your income and expenses. How much can you afford to put toward debt each month? You’ll want to prioritize paying off student loans while also saving for retirement.
If you simply want to help pay back your kid’s student loans, talk to them about it. Let them know you want to help out where you can. Some things to ask yourself before helping your children pay back their debt:
- 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? (which is a different question than what you can afford). 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!
Once you’ve figured out how much you can afford to pay and how much you are willing to pay, talk to your child so you are on the same page. It’s important to set expectations and have an understanding of each of your roles in the debt repayment process.
Look Into Flexible Repayment Options and Forgiveness
If you are having trouble paying back your Parent PLUS loans, look into a new repayment plan that can make repayment easier. Unfortunately, Parent PLUS loans are not eligible for Income-Based Repayment or Pay As You Earn programs.
On the other hand, they are eligible for the Income-Contingent Repayment plan if you consolidate your loans through a Direct Consolidation Loan.
This plan caps your monthly payments at 20 percent of your discretionary income for up to 25 years. After 25 years of repayment, your remaining loans may be forgiven. However, under current tax law, forgiven student loans are considered taxable income.
This plan can be helpful if you are having trouble paying back Parent PLUS loans. But it’s important to know that you’ll pay more in interest and you may get hit with a tax bill.
If you work in the public sector, you may be eligible for the Public Service Loan Forgiveness program. Through this program, your loans can be forgiven after 10 years of repayment at a qualifying nonprofit or public agency.
If you’re interested in pursuing this option, be sure to do your research and make sure you qualify first. In addition, submit any required paperwork and stay in touch with your loan servicer about your repayment options.
If you’re assisting your child with loan repayment, help investigate the appropriate repayment option. For example, maybe your child is on the Extended Repayment plan (25-year plan), but with your financial help, they can switch to a Standard Repayment plan (10-year plan), cutting down the term and saving money on interest.
Consider Refinancing Parent PLUS Loans
Student loan refinancing can be a good option If you have Parent PLUS loans. Through the process of refinancing, you merge all of your loans into one and ideally, receive a better interest rate.
Considering the high rates for PLUS loans, refinancing could potentially save you thousands of dollars and help pay off your loans that much faster. Parent PLUS borrowers are often especially attractive candidates for refinancing, as well, as you probably have a stronger credit profile and 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 (“enough” varies by lender). One thing to be aware of is that through refinancing, you’ll give up federal loan protections such as payment plan flexibility and the option to pursue an income-contingent plan. Depending on your situation, the benefits of refinancing may outweigh the costs.
Another option is to refinance your Parent PLUS loans into loans in your child’s name, effectively putting the responsibility on them. This option is available through Laurel Road, SoFi, and CommonBond.
Become a Cosigner
If your child has limited credit history, consider becoming a cosigner while 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.
By acting as a cosigner, you may be able to help your child save money on interest and get approved for refinancing. According to the Citizens Bank website,
“If a borrower has little or no credit history, Citizens Bank recommends they apply for an Education Refinance Loan with a credit-worthy cosigner such as a spouse or parent. Having a cosigner may help the borrower secure lower monthly payments and a lower interest rate, and can make it easier for them to pay down their student loan debt.”
Through cosigning, you may be able to help your child get approved for lower interest rates, effectively helping them pay back their loans. However, there’s an important thing to consider before signing on the dotted line. As a cosigner, you are legally responsible for your child’s debt if they are not able to pay it back.
In some instances, cosigner release may be an option later on. For example, Citizens Bank allows for cosigner release after 36 consecutive 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, without your help. It may take some time to be eligible for cosigner release, so think carefully about this responsibility.
Should You Tap Your Retirement Funds to Pay Off Debt?
A few years ago, my friend told me her loans were paid off. Shocked, I asked her how she did it so quickly. She let me know her mom withdrew money from her retirement fund to help pay off her Graduate PLUS loans. In return, my friend would pay her mom back, interest-free.
If you want to help your children pay off their student loans, you may have considered doing something similar. But is this a good idea?
If you have the money, using retirement funds to help your child be 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 have time 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 401k, you will pay a 10 percent withdrawal penalty in addition to federal and state income taxes. The same goes for withdrawing funds out of a Traditional 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 an additional tax on those funds.
Regardless, it’s not a good idea to withdraw your own retirement funds to pay off your children’s debt.
Gift Money to Help Pay Off 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. If you want to be sure about where your money is going, consider looking into becoming an authorized payer for their loan servicer.
You can gift small amounts for birthdays, holidays, and if you get a tax refund. If you’re looking at gifting a sizeable amount, though, be aware of the gift tax.
You can gift up to $14,000 without any issues, but if you go over that amount, your gift will count as part of your lifetime exemption. 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 $5.34 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. Bummer, I know.
Stay in Touch With Your Loan Servicer
Parent PLUS borrowers face the unique situation of paying for their children’s education while also trying to manage their own retirement savings. Unfortunately, doing both can spread some borrowers thin.
According to a report by the Government Accountability Office, borrowers 65 and over are defaulting on their loans at a much higher rate. Default can mean garnished wages, Social Security, benefits and more. The report indicates that the amount of people who had Social Security benefits garnished to offset a loan increased five-fold.
The most important thing is to stay in touch with your loan servicer and manage your payments. If you can’t afford your current plan, discuss your options with your loan servicer.
Whether you have Parent PLUS loans or just want to help your children pay back their loans, there are a variety of ways you can manage your payments. Using this guide, you can create a plan of action, so that student loans don’t have to be a permanent part of you or your child’s life.
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