As college costs continue to rise and students are limited to the amount they can borrow, many parents have turned to the Parent Plus Loans as a way to fill the gap. Parent PLUS loans are federal loans that are legally the parents’ responsibility to pay back. With the current low-interest rates, refinancing Parent Plus Loans may be a great idea depending on each parent’s situation.
Parent PLUS loans are becoming a growing issue for many parents trying to plan for retirement. Since 2014, Parent PLUS borrowers are up 11.43 %, totaling 3.5 million people. As of Q3, 2020, Parent PLUS loans total 98.3 billion dollars which have increased 36.72% since 2014 based on the Department of Education data. Due to this debt, more parents will most likely need to delay retirement as some research has indicated.
Here is some information to consider before refinancing your Parent PLUS Loans.
Refinancing vs Consolidation
All federal loans can be refinanced with a private lender. The biggest advantage of refinancing your federal Parent Plus Loans is the opportunity to reduce your interest rate significantly, especially in today’s low-interest-rate environment.
Under the federal program, the term is consolidation. This is different than a private refinancing. Federal consolidation is a simplification of the loans but the interest rates of the original loans are not recast like a private student loan refinancing. Under a federal consolidation, the new interest rate will be the weighted average of the existing loans. This will not allow the borrower to take advantage of the lower market interest rates available today.
Parent Plus Refinancing with Lower Interest Rates
The biggest advantage of refinancing your Parent PLUS loans is that the borrower could get a much lower interest rate on these loans. A Parent PLUS refinancing will be done with a private lender and not the federal government. This will require the borrower to investigate lenders who specialize in refinancing student loans.
A Parent PLUS refinancing is similar to other private loans that most people are familiar with. It will require the borrower to complete a set of financial information. The rate will be determined based on the lenders underwriting rules which will include the borrower’s debt to income ratio, credit history, and income.
Refinancing Parent PLUS Impact on Federal Loan Benefits
If you decide to refinance then a new private loan will be created which will pay off the existing federal Parent PLUS loans directly. Parent PLUS loans that are refinanced are no longer eligible for federal loan repayment benefits. These lost benefits need to be evaluated before making the refinancing decision.
Here is a list of benefits that the Parent PLUS loans have under the federal rules:
Federal Consolidation of Loans
When a person consolidates their federal loans, the interest rate that is calculated uses a weighted average of the existing loans. This is considered a new federal loan. As a result, the time frame could be extended and a new lower monthly payment could result in the payment for the borrower.
If you have multiple children, we recommend that you consolidate the Parent Plus loans associated with each child in the family. This is done for better tracking especially if the child is partly responsible for paying the loan back. All federal loans have a death and disability feature that will also be lost if private loans are done. Further details on that benefit are below.
Flexible Repayment Options
Under the federal repayment programs, there are various repayment options available to the borrow based on the debt type and timing. For Parent PLUS loans, there are four traditional repayment methods available (10 Year Standard, Extended Standard, 10 Year Graduated, and Extended Graduated). There is also one Income-Driven Repayment (IDR) method available called Income Contingent Repayment.
The ICR method uses 20 % of a borrower’s Adjusted Gross Income (AGI) to calculate the monthly payment. If you are married, a couple could file their taxes separately to lower that monthly payment. Proper tax advice would be required.
Death & Disability Benefits Forgiveness
Under the federal loan programs, there are death and disability loan forgiveness benefits for the borrower. With the Parent Plus loans, there are additional benefits for both the borrower and the student whom the loan was taken out for. If a Parent PLUS borrower should die or become disable then all of their Parent PLUS loans would be forgiven for all children.
If the student for whom the loans were taken out should die or becomes disabled then the Parent Plus loans would also be forgiven for that specific child. This is a special additional benefit that Parent PLUS has under the federal loan program. This is why we recommend consolidating the federal Parent PLUS loans by the child.
Public Service Loan Forgiveness and Parent PLUS Loans
Most people do not realize that Parent PLUS loans qualify for Public Service Loan Forgiveness (PSLF). They need to be Direct Consolidated loans and the borrower must use the ICR method of repayment. Some advanced planning must be done since the borrower will need to make 120 on-time payments for the loans to be forgiven and be employed by the proper company type.
Additional analysis needs to include the planned retirement date and the security of the borrower’s employment.
Parent PLUS Refinancing Summary
Interest rates are currently low and this could be a great time to refinance your Parent PLUS loans. Refinancing could lower your monthly payments significantly. You need to evaluate the lost federal benefits before making the refinancing decision.
