Repaying a parent PLUS loan while managing your personal 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.
In this repayment guide, we’ll help you come up with an effective plan of action.
- Set your parent PLUS loan repayment game plan
- Ask yourself how you want to help your child with loan repayment
- Important questions for parent PLUS borrowers to consider
- Don’t lose sight of your financial goals to help your child
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 7.08% for loans disbursed on or after July 1, 2019. Plus, there’s a loan fee of 4.236%.
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.
Explore income-contingent repayment
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.
But they are eligible for income-contingent repayment (ICR) if you consolidate them first via a Direct consolidation loan. Here’s how ICR works:
- 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.
Look into refinancing 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.
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.
- Should you tap into your retirement funds to pay off your child’s loan debt?
- Can you gift money to help pay off your child’s student loans?
- Can you pay off a parent PLUS loan early?
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 years’ worth 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.
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 to be 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, the current tax code doesn’t consider student loan payments as part of those qualified expenses.
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.
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.
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 4, 2022.
2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.
Student Loan Refinance Interest Rate Disclosure Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.99% APR to 8.24% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.99% APR to 8.24% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. The maximum rate for your loan is 8.95% if your loan term is 10 years or less. For loan terms of more than 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%. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Let us know if you have any questions and feel free to reach out directly to our team.
3 Important Disclosures for SoFi.
Fixed rates range from 3.49% APR to 7.99% APR with a 0.25% autopay discount. Variable rates from 1.74% APR to 7.99% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.
4 Important Disclosures for Laurel Road.
Laurel Road Disclosures
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.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of April 29, 2021. Information and rates are subject to change without notice.
5 Important Disclosures for Navient.
6 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 5/17/2022 student loan refinancing rates range from 2.05% APR – 5.25% Variable APR with AutoPay and 2.49% APR – 7.93% Fixed APR with AutoPay.
7 Important Disclosures for PenFed.
Fixed Rate Loan Terms: 5 years/60 monthly payments, 8 years/96 monthly payments, 12 years/144 monthly payments or 15 years/180 monthly payments. Annual Percentage Rate is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed rates range from 3.29% to 5.43% APR. Rates are subject to change without notice. Fixed APR: Fixed rates will not change during the term. This rate is expressed as an APR. Since there are no fees associated with this loan offer, the APR is the same percentage as the actual interest rate of the loan. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
8 Important Disclosures for CitizensBank.
Education Refinance Loan Rate Disclosure: Variable interest rates range from 1.99%-8.38% (1.99%-8.38% APR). Fixed interest rates range from 2.99%-8.63% (2.99%-8.63% APR).
IS Variable Rate Disclosure: Variable Rates advertised are based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of December 1, 2021, the one-month LIBOR rate is 0.09%. Variable interest rates will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree and presence of a co-signer. Your final variable rate may be based upon the 30-day average SOFR index, as published by the Federal Reserve Bank of New York. The maximum variable rate is the greater of 21.00% or Prime Rate plus 9.00%.
ERL Variable Rate Disclosure: Variable interest rates are based on the 30-day average Secured Overnight Financing Rate (“SOFR”) index, as published by the Federal Reserve Bank of New York. As of May 1, 2022, the 30-day average SOFR index is 0.29%. Variable interest rates will fluctuate over the term of the loan with changes in the SOFR index, and will vary based on applicable terms, level of degree and presence of a co-signer. The maximum variable interest rate is the greater of 21.00% or the prime rate plus 9.00%.
Fixed Rate Disclosure: Fixed rate ranges are based on applicable terms, level of degree, and presence of a co-signer.
Lowest Rate Disclosure: Lowest rates are only available for the most creditworthy applicants, require a 5-year repayment term, immediate repayment, a graduate or medical degree (where applicable), and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Rates are subject to additional terms and conditions, and are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer. Borrowers should carefully review federal benefits, especially if they work in public service, are in the military, are considering possible loan forgiveness options, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision on our website including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.