If you are like a lot of parents (and some grandparents), you took out student loans for your child’s education. Now with retirement or other life changes ahead, you may want to explore your options and find out how to refinance a parent plus student loan.
For parents with either federal Parent PLUS Loans (through the government) or private student loans (through a bank, credit union, or other financial institution), you may be exploring the idea of saving on interest – and/or paying off your debt more quickly – through refinancing. But can you refinance parent plus student loans and if so, do you want to?
Let’s take a look at the differences:
Parent PLUS Loans Refinanced Student Loans
Avg. Interest Rate 2021 6.28% 3.5%
Avg. Loan Fees 4.236% 0
Credit Requirements No Adverse History Good Credit (>650)
Option to Cosign No Yes
In this article, we delve into refinancing for parent student loans and answer questions about the pros and cons. We also explore ways to make the process as straightforward as possible.
What does it mean to refinance Parent PLUS loans?
Like a mortgage, student loans can be refinanced. However, a mortgage is a secured loan, meaning there is collateral (like a house or property) that will appreciate in value over the life of the mortgage contract. When you refinance, you can opt to take some or all of the equity as proceeds and refinance the mortgage for that amount and the remaining balance.
With student loans, the debt is unsecured and uncollateralized — there is no appreciation. You benefit by timing your refinance to coincide with a drop in interest rates so that you can save money on your loan. When you refinance Parent PLUS loans, your new lender pays off the existing loan(s) and assumes the debt. They then become your ongoing lender with a better deal for you.
Which student loans can parents refinance?
There are two types of student loans that parents can qualify for and ultimately refinance — federal Parent PLUS Loans and private student loans.
Federal Parent PLUS Loans are part of the direct loan program through the US Department of Education. The current fixed rate is 6.28% (as of July 1, 2021) but has been as high as 7.90% over the last ten years with a cap for variable loans as high as 10.5%. So depending on when you took out the loan, you could be paying a much higher interest rate when compared to today’s refinance rates.
You also may have opted for private student loans which, in the past, have carried a higher interest rate than federal funds rates. Private student loans carry some great advantages, but only recently have they had the low interest rates associated with today’s economy.
There is one other way that parents may have contributed to their child’s education and that’s through cosigning for their student loans. While this situation has a slightly different process, a child can still refinance a cosigned loan into their name alone to free their parents from any further obligation.
The bottom line is with strong credit and solid income, you can refinance Parent PLUS Loans or private loans to a better interest rate and repayment term to fit your needs. Just make sure you understand your current interest rate and loan terms so that you can make an educated decision.
Can I refinance a student loan as a cosigner?
No, this isn’t possible. When you sign on as a cosigner, you are agreeing to vouch for the person who is taking on the debt, and you become liable for the repayment of the debt. But it’s only the person who’s the primary borrower who can opt to refinance.
However, with some private lenders, you can be removed as the cosigner after the primary borrower has made a number of payments on time and in accordance with the loan terms. If that’s something you want to consider as you pursue refinancing, be sure to check with lenders as you choose your refinancing options.
Can you refinance Parent PLUS Loans vs private student loans?
If you have asked yourself how to refinance Parent PLUS Loans vs private student loans, the answer is simple. There is no difference in the actual refinance process. The government doesn’t get into the business of refinancing loans, so you will be looking to a private lender when it comes to refinancing that student loan.
However, there are certain drawbacks to consider when refinancing federal loans specifically – more on that below.
The good news is private lenders allow you to refinance both federal Parent PLUS Loans and private loans into one loan package with a lower rate and customizable terms.
What are the benefits of refinancing parent loans?
Can parents refinance student loans? You bet! Let’s take a look at the benefits of refinancing federal and private parent loans and why it could be worth your time to find a good option.
Save money on parent student loans
One of the main reasons to refinance any loan is to acquire a lower interest rate where you can save money on the life of the loan. Interest is the fee you’re paying a lender to provide money while you pay a debt over time. If you can lower that amount, you can save money.
For example, if you have student loan debt of $35,000 with 7.5% interest and a 10-year loan term, your monthly payments would be $415.46 per month. Over the life of the loan, you would end up paying $14,854.74 in interest alone.
If you were to refinance that same amount of $35,000 to a loan with 2.99% interest (the current rate for someone with excellent credit) for a 10-year loan, your monthly payment would drop to $337.80 per month and your total interest would plummet to $5,536.13. You would save over 60% or $9,318.61.
Pay off parent loan debt more quickly
If your personal circumstances allow you to shorten the loan terms, you could pay off the student loan debt more quickly. And with the lower interest rates available today, you could still save money.
Taking the example above, you can save even more money by paying off the loan sooner and still pay less monthly. With the same 2.99% interest rate, but a loan term of 5 years — your monthly payment would be $628.75, but your total interest paid would be only $2,724.92. That means you would save a whopping $12,129.82 or over 80% of the original interest amount.
When you ask yourself how to refinance parent student loans, this might make the most sense. Especially if you have other financial goals like preparing for retirement or saving for that dream vacation.
Consolidate your monthly parent loan payments
Refinancing parent student loans allows you to consolidate and simplify your monthly payments. If you have several student loans with different due dates and different Parent PLUS loan interest rates, refinancing provides an excellent opportunity to pay those smaller loans off, and then you have one simple payment in their place.
Transfer parent student loans to your child
Refinancing with a private lender would allow your child to assume the student loan debt and take responsibility for repayment. Parents often look to transfer their student loan debt into the child’s name once that child has graduated and has a good income. It’s a way for the child to build their own credit history and frees up the parent’s resources for other things.
No fees to refinance parent loans
Unlike federal Parent PLUS Loans, there are no loan origination fees or application fees when you refinance through Purefy with a private lender. And if you want to pay off that refinanced loan early or make additional payments to the loan principal, there are no pre-payment penalties with most lenders.
What are the drawbacks of refinancing federal Parent PLUS Loans?
When refinancing parent loans, there are some drawbacks to consider — especially if you want to refinance federal Parent PLUS Loans and would ever want to use any of the protections the government offers through their direct loan program.
If these federal protections are important to you, refinancing with a private lender may not be the best option.
You lose the repayment options afforded by federal loans
When you refinance with a private lender, you lose the generous repayment plans as well as the federal deferment and forbearance plans. (Some private lenders offer forbearance as well in certain circumstances, but specifics vary from lender to lender.)
For example, if you have been participating in an income-driven repayment plan for your federal Parent PLUS loan, refinancing with a private lender will cause you to lose access to that program.
You lose the Public Service Loan Forgiveness option
Refinancing your federal Parent PLUS Loans with a private lender would affect your ability to participate in the government’s Public Service Loan Forgiveness program. This program is available to people who work in a public service career and it then forgives their federal student loans after 120 monthly payments.
Who can qualify for student loan refinancing?
For parents, if you have either federal Parent PLUS Loans or other private student loans for one child or for several children, those loans can be refinanced into one loan package with a single due date and one monthly payment.
When considering stepping into the refinancing ring, evaluate your stance and make any adjustments before making a final application for a loan.
Make sure to check these three things:
As you already know, your credit history is your calling card to the financial industry and it’s better to present a crisp, clean card than one that is torn, crumpled, and dirty. The financial world is in the business of lending money and they have sophisticated algorithms and computer modeling systems that determine your creditworthiness and the cost of borrowing their money (your interest rate).
To give yourself the best chance of obtaining a choice interest rate and optimal terms, be sure that your credit score is in good shape.
Income and employment history
Lenders want to make sure that you are a reliable candidate and that you have the means to repay their loan. The most important gauge is your income and employment history. This tells a lender that you make a qualifying amount of income for the loan you’ve requested, but also lets them know more about your steadfastness and consistency.
If your job history is spotty, lenders look at that as a sign of being undependable. That can reflect badly on your ability to get the best refinance deal.
Debt-to-Income Ratio (DTI)
Last, lenders want to know what type of expendable income you have — if you are overextended with debt or if you have plenty of resources to repay your loan. They determine that using your DTI.
It’s easy to figure out. Add up all of your monthly debt payments and divide by your gross monthly income including any income from your job or business as well as alimony or investment income. Lenders like to see this number at less than 38%.
Who should refinance Parent Plus loans?
Refinancing student loans is something that can be done more than once when the circumstances are right.
Today, interest rates are at all-time lows. The Federal Reserve has kept its bank rate at 0.0-0.25% in 2021 and has indicated that it will keep rates low until the economy recovers from the devastation brought by the coronavirus pandemic. However, things are looking up and the economy looks to be recovering more quickly than expected.
Guaranteed low rates are not promised indefinitely and as the economy heats up, you can expect the interest rate will head up too.
People who want to save money or change their terms – who have a solid credit history – should consider refinancing especially when market rate offers are low.
Save money through a lower interest rate
As we’ve said before, interest rates are at historic lows and that is good news for parents who want to refinance their federal and private student loan debt. In fact, with excellent credit and solid income, private lender rates are starting in the high 2% range for fixed-rate loans. Interestingly, these rates are far below the current federal rate for new Parent PLUS loans at 6.28%.
As we demonstrated above, lower interest can save you money on your monthly payments which adds up over the full life of the loan. By securing a lower payment, you have the additional expendable income to pursue the things you have earned.
Consolidate multiple loans
By refinancing multiple parent loans, you can combine them into one easy, no-fuss payment with a single due date. No more juggling numerous bills throughout the month. Plus, some lenders offer an additional rate reduction if you take advantage of auto payments, often up to .25% off your interest rate.
Customize the terms of your loan
When you restructure your parent loan through refinancing, you can customize your payment terms to meet your current lifestyle needs. And there’s no penalty when you refinance student loans in the parent’s name if you choose to pay off the loan early.
You may have different needs than when you took out your current parent loan. You may want to shorten your repayment period so that you can be done paying sooner or you may want to stretch out the payments and lower your monthly obligation until your child can assume responsibility. Whatever the need, you can do that when you refinance.
How does the process work to refinance parent student loans?
Here’s a step-by-step process that will walk you through the process of refinancing your parent loans.
1. Decide if refinancing is right for you — the key to a successful refinance is when it works for you and helps you meet your financial goals. Start by comparing your current interest rate (or the combined average if you have multiple parent loans) to possible loan rates available in the market. If you have refinanced recently, you may already have a loan rate that is very low. In those cases, it may not make sense to refinance right now.
For mortgages, the rule of thumb is usually a 2% drop in an interest rate that makes the savings worthwhile. But for student loans that don’t have any origination fees, 1% (or even anything lower that will save you money) might make sense.
2. Research lenders and gather pre-approval information — next, do your research. Purefy’s free rate comparison tool will bring industry-leading lenders together in one place to offer you their best rates and terms based on your financial criteria. With some simple information, you will receive real, prequalified offers that show you what kind of savings you can expect with no impact on your credit report.
3. Make your loan terms and lender selection — Once you have your loan comparison, go through each offer to see which one makes sense for you. Do you want a fixed or variable loan? Is a longer loan term better or will short do the trick? When you have the best loan offer picked out, it’s time to gather information for the application.
4. Complete your application — Now that you’re prequalified, it’s time to submit your application. Your supporting documents can be uploaded to complete your application, including:
- Loan statements
- Proof of employment – W-2, tax returns, recent paystubs
- Proof of residency or a government-issued ID
- Proof that your child graduated and from what school
5. Sign your final documents and you’re ready to go! — Once you sign your final documents, your new lender will pay off your old loans. You want to keep sending payments to your original lender until you get written confirmation that everything has been transferred. Going forward, you’ll just have your one refinanced loan to worry about and you can begin enjoying your savings!
Why should I compare parent refinance student loan rates before applying?
To start, you’re talking about a consequential amount of money — don’t you want the absolute best loan interest rates and terms you can qualify for? You want to work with reputable lenders who are highly sought after and who genuinely want your business. You want options in terms of repayment time frames, and you don’t want to pay origination fees or prepayment penalties.
By using Purefy’s free rate comparison tool, you get verified transparency from lenders that are thoroughly vetted, and you get the best rates in the industry. You’re also working with NerdWallet’s 2021 Best Student Loan Refinancing website that sports a five-star rating.
In only takes about 2 minutes or less to see your accurate prequalified rates from the industry’s best lenders, based on your own personal situation – with no impact to your credit score and zero fees.
If you took out student loans – either federal Parent PLUS Loans or private student loans – to help fund your child’s education, then you need to consider refinancing as a way to save money on interest or pay off that debt faster.
There has never been a better time with interest rates at rock bottom and top-tier lenders eager for your business. In a simple, straightforward process that takes about 2 minutes, you can submit your information to get pre-approved offers that you can sort and compare right on Purefy.
If you have questions or would like help with the process, don’t hesitate to sign up for a free student loan refinance consultation with one of our student loan experts. They can answer your questions, help you fill out your application, and work with you to compare rates and make a solid decision. It’s always good to have someone in your corner!
So when you ask yourself the question, “Can a parent refinance a student loan?”, the answer is yes. Take this opportunity to see what our best lenders have to offer for interest rates and loan terms.