If you’re like many college graduates, you had help from your family with your education costs.
Many parents borrow money to pay for at least a portion of their child’s college expenses. In fact, 21% of parents take out student loans to help pay for school, and one of the most common options is federal Parent PLUS Loans. According to Federal Student Aid, approximately 3.7 million parents had $105.4 billion in outstanding Parent PLUS Loans as of 2021.
While Parent PLUS Loans can give you the money you need to complete your degree, having to repay that high-interest debt can be difficult for your parents. As you build your career, you may be wondering if it’s possible to transfer Parent PLUS Loans to the student, instead. If you’re considering this option, here’s what you need to know about taking over your parent’s PLUS loans.
3 reasons to transfer Parent PLUS Loans into your own name
With Parent PLUS Loans, you aren’t legally obligated to repay the loan; your parents are. They are the sole borrowers on the loan, even though they were borrowing money to pay for your education. That means they’re responsible for making the minimum payments, repaying the total balance, and paying the interest charges instead of you.
However, helping your parents with the payments can be an incredible gift to them. If you’re financially secure, transferring Parent PLUS Loans into your own name can give your parents significant relief for the following reasons.
1. Parent PLUS Loans can affect your parents’ credit
When your parents take out Parent PLUS Loans for you, the loans show up on their credit reports. The loan affects their debt-to-income ratio, or the amount of debt they have relative to their income.
Lenders look at borrowers’ debt-to-income ratios when reviewing their applications for lines of credit, such as car loans or mortgages. If an applicant’s debt-to-income ratio is too high, the lender will deny the borrower’s application.
If your parents are planning on buying a new home or car, having Parent PLUS Loans on their credit report could make it difficult or even impossible for them to do so.
2. Parent PLUS Loan payments can hurt their ability to save for retirement
Currently, the average loan balance for Parent PLUS Loan borrowers is $28,778. PLUS Loans typically have a 10-year repayment term, and loans issued before July 1, 2022 will have an interest rate of 6.28%. With that loan balance, term, and interest rate, the average monthly payment would be about $323 per month.
Considering that many people are behind on saving for retirement already, having to worry about student loan payments can worsen the problem. Having to pay $323 per month toward Parent PLUS Loans instead of saving that money toward retirement can cost your parents over the long run.
To put it in perspective, consider an example. Let’s say you took over the loan right away, and your parents didn’t have to make any payments at all. By freeing up $323 per month in their budget, they were able to tuck that money into their retirement accounts instead.
If they earned an 8% average annual return, their account would be worth $56,149 after ten years — the time it would’ve taken them to pay off the loans. That’s money they’d completely lose out on if they had to pay the PLUS Loans themselves.
3. Parent PLUS Loans don’t have the same repayment options as other loans
While federal student loans tend to have robust repayment options, Parent PLUS Loans are more limited. They aren’t eligible for income-driven repayment (IDR) plans unless your parents first consolidate the loans with a Direct Consolidation Loan. Then, the loan is eligible for just one IDR plan, income-contingent repayment.
Without all of the other federal perks, Parent PLUS Loans aren’t as advantageous as other federal student loans.
How to transfer Parent PLUS Loans to student borrowers
If your parents want to transfer Parent PLUS Loans to a child, they can’t do it and keep the loans within the federal loan system. Instead, the only way to transfer Parent PLUS Loans to student borrowers is to refinance the loans with a private lender.
When refinancing Parent PLUS Loans, you apply for a loan for the amount of the existing PLUS Loans and use it to pay off the loans. Going forward, you are solely responsible for the debt; your parents are no longer obligated to make payments, and the old PLUS Loans will show up as paid in full on their credit report.
To transfer the loans, follow these three steps.
1. Make sure you’re financially ready for the payments
Once you refinance the PLUS Loans, the loans will be entirely in your name. Before submitting a loan application, make sure you can comfortably afford the payments. Otherwise, you risk falling behind and damaging your credit.
2. Review lenders’ eligibility requirements
Not all lenders allow you to refinance Parent PLUS Loans and transfer them to another person. Only a few lenders, such as SoFi and ELFI, allow you to transfer Parent PLUS Loans to a child. When looking for a lender, check its policies to see if it allows Parent PLUS Loan refinancing and transfers.
3. Compare rate quotes from refinancing lenders
Before refinancing, compare rates quotes from multiple lenders so you can get the best rates and terms. You can use Purefy’s Compare Rates tool to get quotes from top refinancing lenders without affecting your credit score so you can quickly find your best offer to save the most money.
Repaying and Refinancing Parent PLUS Loans
If your parents took our Parent PLUS Loans to help you pay for college, taking over responsibility for their debt can be a huge favor to them. By refinancing Parent PLUS Loans with a private lender, you can transfer the Parent PLUS Loans into your own name. And, you may qualify for a lower rate and save money over the life of your repayment term by refinancing your student loans, too.
