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.
Interested in refinancing your Parent PLUS loans?Here are the top 9 lenders of 2021!
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|1.99% – 5.64%2|
|3.80% – 9.36%3|
|1.91% – 5.25%4|
|2.25% – 6.53%5|
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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 1, 2021.
2 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 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% 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 October 26, 2020, 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 10/26/2020. 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 protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 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.
3 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. 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 0.15% effective Jan 1, 2021 and may increase after consummation.
4 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 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
5 Important Disclosures for SoFi.
6 Important Disclosures for PenFed.
Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.15%-4.42% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. 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.
7 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.
8 Important Disclosures for Nelnet.
Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.
Interest rate reduction of .25% for automatically withdrawn payments from any designated bank account (“auto debit discount”). Auto debit discount applies when full payments (including both principal and interest) are automatically drafted from a bank account. The auto debit discount will continue to apply during periods of approved forbearance or deferment if the auto debit discount was in effect at the time of receiving the forbearance or deferment. Auto debit discount will remain on the account unless (1) the automatic deduction of payments is canceled or (2) there are three consecutive automatic deductions returned for insufficient funds at any time during the term of the loan.
Request for the cosigner to be released can be made by the borrower after 24 consecutive, on-time payments (not later than 15 days after the due date) of principal and interest have been made. Borrowers in deferment or forbearance must make 24 consecutive, on-time payments after re-entering repayment to qualify for the release. The borrower must be current on their payments at the time of the cosigner release request and show the ability to assume full responsibility of the loan(s) by meeting certain credit criteria on their own at the time of the request, including, but not limited to, being a U.S. citizen or having permanent residency in the United States, being the age of majority in their permanent state of residency, providing sufficient proof of income, and having no student loans in default.
Hardship forbearance allows you to temporarily suspend payments on your loan(s) while you are experiencing financial hardship. It is offered in increments of two or three months, with a maximum of 12 months available, in aggregate, over the life of the loan. If your loan(s) are in good standing at the time of your request, you will be eligible for forbearance in increments of two monthly payments. If, at the time of your initial request, your loan(s) are considered past-due, you will be eligible for forbearance in increments of three monthly payments. Future increments of forbearance, up to a life-time maximum of 12 months, may be requested upon the completion of making a certain number of principal and interest payments. During the two- or three-month forbearance period, you will not be required to make payments; however, any unpaid interest will continue to accrue and will be capitalized (added) onto your principal balance at the end of the forbearance period. You may continue making payments in any amount without penalty during the forbearance period. Your loan repayment term will be extended by the number of months in the forbearance period.
Refinance Loan Eligibility: You must be a U.S. citizen or permanent resident alien with a valid U.S. Social Security number, and be the legal age to enter into binding contracts in your permanent state/territory of residency, or be at least 17 years of age and apply with a cosigner who is at least the age of majority in their state/territory. Non-residents can apply with an eligible cosigner who is a U.S. citizen or permanent resident alien with a valid U.S. Social Security number. The student loans you refinance must be in their grace or repayment period, and you can no longer be enrolled in school on a half-time or more basis. You must have at least $5,000 in student loans to refinance. You, or your eligible cosigner, must have an annual income of at least $36,000. Approval subject to credit review. Other credit criteria may apply.
Refinance Loan Limits:
Loan Refinancing Risks: Federal student loans include benefits that may not be offered with private student loans. Carefully review any potential benefits that may be lost by refinancing federal and private education loans, such as the loss of any remaining grace periods. To learn more about what to take into consideration when refinancing federal student loans with private education loans, click here
Selecting ‘Get Started’ results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.
Fixed interest rates range from 2.99% APR (with auto debit discount) to 6.25% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. The fixed interest rate will remain the same for the life of the loan.
Variable interest rates range from 2.00% APR (with auto debit discount) to 5.63% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. Variable rates may increase after consummation. The variable interest rate is equal to the One-Month London Interbank Offered Rate (“One-Month LIBOR”) plus a margin. The One-Month LIBOR in effect for each monthly period (from the first day of the month through and including the last day of the same month) will be the highest One-Month LIBOR published in The Wall Street Journal “Money Rates” table on the twenty-fifth (25th) day (or if such day is not a business day, the next business day thereafter) of the month immediately preceding such calendar month. The Annual Percentage Rate (APR) for a variable interest rate loan will change monthly on the first day of each month if the One-Month LIBOR index changes. This may result in higher monthly payments. The current One-Month LIBOR index is 0.15% as of 5/4/2021.
The lowest interest rate for each loan type requires automatically withdrawn (“auto debit”) payments, a five-year repayment term, and the borrower making immediate principal and interest payments. Not all borrowers will receive the lowest rate. The interest rate and Annual Percentage Rate (APR) may be higher depending upon (1) the credit history of the borrower and, if applicable, the cosigner, (2) the repayment option and loan term selected, (3) the loan type selected, and (4) the highest level of education attained. If approved, applicants will be notified of the rate qualified for within the stated range.
*Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score. **Your actual savings may vary based on interest rates, outstanding balances, remaining repayment terms, and other factors.