Are Parent PLUS Loans Hurting My Finances?

are-parent-plus-loans-hurting-finances

If you took out student loans to help put your child through college, you’re not alone. More than 3.6 million borrowers have $89.8 billion in Parent PLUS Loans from the federal government, and that’s not even including parents who choose to borrow additional loans from a private lender.

That’s an average Parent PLUS Loan balance of $24,944 per borrower.

That balance can be financially crippling for some parents, especially if you’re simultaneously trying to pay off other debts and save for your fast approaching retirement.

If you’re struggling, here are some answers to some of the questions you may have including how to pay off Parent PLUS Loans more quickly and how to refinance Parent PLUS Loans to save money.

Why do Parent PLUS Loans have such high interest rates?

For Parent PLUS Loans disbursed for the 2020-2021 school year, the interest rate is 5.3%, which is a sharp decline from 7.08% the previous year. Depending on when you borrowed money, your rates may vary.

Interest rates on Parent PLUS Loans are generally higher than what your student would qualify for with undergraduate federal student loans. Congress sets federal loan interest rates on an annual basis, but doesn’t provide exact details about how it determines the figures.

The good news is that having a high interest rate may open up opportunities to refinance your debt at a lower interest rate than what you’re currently paying.

How does Parent PLUS debt impact my finances?

Helping your child get through college is an admirable gesture, and there’s no right or wrong answer as to whether or not you should do it.

But if you’re not careful, borrowing money via Parent PLUS Loans or private student loans can have a significant impact on your financial well-being.

For starters, adding another monthly debt payment can make it difficult to keep up with your other debt payments. It also takes that cash flow away from other important financial goals, especially retirement.

You’ll also end up paying more interest on Parent PLUS Loans than you would if you were to agree to make payments on your child’s undergraduate student loans.

Finally, adding another debt payment to your credit report may make it challenging to get approved for credit in the future when you need it. Your debt-to-income ratio — the percentage of your gross monthly income that goes toward debt payments — is especially important when you’re trying to buy a house and need to take on a mortgage loan.

How to pay off Parent PLUS Loans more quickly

If you’re overwhelmed by your Parent PLUS Loans or private student loan debt, here are a few ways you can get rid of it more quickly.

Transfer Parent PLUS Loans to the student

While taking out parent loans can help get your child through school, it may be wise to transfer the debt to them once they’ve finished school and have the means to repay. You can refinance Parent PLUS Loans to your student (private parent loans, too) with a private student loan refinancing company.

Of course, you’ll both need to be on board to make this work, so have a conversation with your child about the arrangement before you start the application process. Also, keep in mind that refinancing student loan debt generally requires a great credit score and a solid income, so you may not be able to transfer the debt to your child until they achieve both.

If you can make it work, though, it’ll free up that monthly cash flow for other important financial goals.

Refinance your parent loans on your own

If you’re wondering how to refinance Parent PLUS Loans on your own, the process is similar to refinancing the debt in your child’s name. You’ll work with a private lender to replace your existing loans with a new one.

The primary benefit of refinancing parent loans is the potential for reducing your interest rate and monthly payment. However, you may also have the chance to shorten your repayment term. This will result in a higher monthly payment, but if you can afford it, you’ll wave goodbye to your Parent PLUS Loans faster while saving both time and money on accrued interest.

Remember, though, that you’ll need to meet relatively high credit and income standards to qualify for the best rates.

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Make extra Parent PLUS Loan payments

If refinancing your parent loans isn’t an option for you or your child, look for opportunities to accelerate your debt payment through additional monthly payments.

If you have loans with different interest rates, consider using the debt snowball or debt avalanche method to speed up the payoff process.

With the debt snowball method, you’ll make your regular monthly payments on all of your loans except for the one with the lowest balance. Apply your extra payments to that loan until it’s paid in full. Then, tackle the loan with the next-lowest balance by applying what you were paying on the recently paid off loan in addition to its regular monthly payment until it’s paid off, too.

You’ll continue this process with each loan until you’re completely debt-free.

The debt avalanche method works similarly to the debt snowball method, but instead of targeting the loans with the lowest balances first, you’ll focus on the ones with the highest interest rates.

Neither option is inherently better, so consider your goals and preferences to make the right choice for you.

How to refinance Parent PLUS Loans: The process

Before you apply for refinancing, it’s important to remember that replacing your Parent PLUS Loans with a private loan will cause you to lose access to federal loan benefits. That includes loan forgiveness programs, the income-contingent repayment plan and generous forbearance options if you’re experiencing financial hardship.

But if you don’t anticipate needing those benefits, here are the steps for refinancing your Parent PLUS Loans, private parent loans, or both:

  • Check your credit: View your credit score and report to get an idea of where you stand. If your credit score is less than stellar, you may need to take time to improve your credit before you submit an application to refinance.
  • Shop around: It’s crucial that you compare at least three to five lenders to maximize your chances of getting a low interest rate. Use the Purefy Compare Rates Tool to view loan offers from multiple lenders in one place so you can easily find your best option.
  • Run the numbers: Depending on the interest rate and repayment term you’re considering, compare what you’ll pay each month to what you’re paying now. Also, compare the total interest charges between your current arrangement and the new one to get an idea of how much you might save.
  • Submit your application: You can get pre-qualified with student loan refinancing lenders with just a soft credit check. But to get a final rate offer, you’ll need to undergo a hard inquiry on your credit report. Try to avoid doing this with multiple lenders, as each hard inquiry can harm your credit score.

Remember: If you’re planning to refinance Parent PLUS Loans to your student, you’ll need to do this process with them to make sure it’s a good fit and they’re eligible for the transfer.

As you take steps to address your parent loans, you’ll be in a better position to tackle them in the right way and set yourself up for a better financial future.

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