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How and When to Consolidate Parent PLUS Loans

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If you were worried about your child taking on too much debt or they exhausted their own student loan options, you may have decided to take out Parent PLUS Loans to help them pay for their education. It’s a common decision: as of the end of 2020, 3.6 million borrowers owed $100.8 billion in Parent PLUS Loans.

Unfortunately, Parent PLUS Loans can be a significant burden. They have the highest interest rates of any federal loan, and they aren’t eligible for most alternative payment plans, like other loan types are.

If you’re struggling with Parent PLUS Loans, loan consolidation or parent loan refinancing can be useful strategies. Continue reading to learn how to consolidate Parent PLUS Loans and make your debt more manageable.

The problem with Parent PLUS Loans

Parent PLUS Loans were introduced in 1980 to help families pay for college. The program has gone through many changes over the years, including adjustments to loan maximums.

With federal loans for undergraduate students, there are annual and aggregate borrowing limits that apply to all borrowers. Depending on the students’ dependency status and year in school, the annual limit ranges from $5,500 and $12,500 per year. Considering that The College Board reported that a single year of tuition costs anywhere from $10,560 to $37,650 per year, students may not be able to borrow enough money in federal loans to cover the entire cost on their own.

For students that reach the annual or aggregate federal loan limits, Parent PLUS Loans play an important role. There is no borrowing cap on Parent PLUS Loans, so parents can borrow up to the total cost of attendance of their child’s program, and even take out loans for each of their children.

While parent loans can help cover remaining education costs, they can cause parents to take on significant amounts of debt as college costs increase. According to a study by the Trellis Company, the average annual amount that parents borrow has tripled since 1993. As of 2020, borrowers owe an average of $28,000 in Parent PLUS Loans. Worse, Parent PLUS Loans tend to have very high interest rates.

Parent PLUS Loan interest rates and fees

While interest rates on federal student loans tend to be low, Parent PLUS Loans are the exception. Loans disbursed between July 1, 2020, and June 30, 2021 have an interest rate of 5.30%. However, loans disbursed in prior years had much higher rates. For example, if you took out a Parent PLUS Loan in 2019, the rate was a staggering 7.6%

In addition, Parent PLUS Loans charge disbursement fees. Loans disbursed between October 1, 2020, and September 30, 2021 have a 4.228% fee that is deducted from the loan amount.

With its high rates and fees, Parent PLUS Loans can be an expensive form of debt. Your loan balance can quickly balloon out of control thanks to accrued interest, causing you to owe far more than you initially borrowed.

3 Strategies for managing Parent PLUS Loans

If you’re overwhelmed by Parent PLUS Loans, there are a few different strategies you can use to make your debt more manageable.

1. Federal Parent PLUS Loan consolidation

If you have multiple parent student loans, federal loan consolidation is one option that can give you some relief. With this approach, you apply for a Direct Consolidation Loan for the total amount of your federal loans. Afterward, you’ll have just one loan instead of several, and you can even get a longer repayment term. Direct Consolidation Loans can have terms as long as 30 years.

If you’re wondering how to consolidate parent PLUS Loans, the process is pretty simple: you can apply for a Direct Consolidation Loan online. Federal loan consolidation is free, and the application takes just a few minutes to complete.

2. Apply for Income-Contingent Repayment

For most borrowers, income-driven repayment (IDR) plans can be a big help since you can qualify for a lower monthly payment. With IDR plans, your payments are based on your discretionary income. Depending on your family size and income, you could dramatically lower your payments. 

However, Parent PLUS Loan borrowers aren’t eligible for federal income-driven repayment (IDR) plans. But there is a workaround. If you consolidate your loans with a Direct Consolidation Loan, your debt will then be eligible for Income-Contingent Repayment (ICR), one of the four IDR plans.

Under ICR, your payments will be the lesser of 20% of your discretionary income or what you would pay with a fixed repayment plan over 12 years adjusted to your income. The repayment term is extended to 25 years. If you still have a balance on your loans after 25 years of making payments, the government will discharge the remaining balance. However, keep in mind that the discharged amount may be taxable as income when you file your tax return.

If you use this strategy, enrolling in ICR can also help you achieve loan forgiveness through Public Service Loan Forgiveness (PSLF). This program will allow you to qualify for forgiveness after working for a non-profit organization or government agency for 10 years. Until you consolidate your loans and enroll in ICR, Parent PLUS Loan borrowers aren’t eligible for PSLF.

3. Refinance Parent PLUS Loans

Another way to manage your loans more effectively is through student loan refinancing, sometimes referred to as private student loan consolidation. This is an especially helpful approach if you have other forms of student loan debt, such as private parent loans.

To refinance your parent loans, you apply for a loan for the amount of some or all of your existing student loans. Refinancing lenders are private rather than federal, and offer different loan terms.

Depending on your credit and what terms you select, you could qualify for a lower interest rate or a smaller monthly payment.

Refinancing Parent PLUS Loans is one of the easiest ways to save money!

If you’re looking to save on high-interest Parent PLUS Loans, refinancing can be the fastest and simplest strategy to secure a lower rate.

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Pros and cons of refinancing Parent PLUS Loans

If you’re thinking about refinancing your Parent PLUS Loans, there are some advantages and drawbacks to consider:

Pros

  1. You can simplify your payments: If you have multiple student loans, juggling your different payments and due dates can be confusing. By refinancing, you can combine your loans into one and have just one easy payment to remember.
  2. You can save money: Refinancing Parent PLUS Loans can help you save money. You can qualify for a lower interest rate and cut down on interest charges.
  3. You can lower your payments: With a lower interest rate or different repayment term, you can reduce your monthly payments and get more cash flow each month.

Cons

  1. You’ll lose eligibility for federal forbearance: When you refinance your loans, they are transferred to a private lender. You’ll no longer be eligible for federal forbearance or deferment programs. Some private lenders offer financial hardship programs, but they tend to be shorter in duration than the federal options.
  2. You’ll no longer qualify for ICR: Because refinanced loans are with private lenders, you will no longer be able to take advantage of ICR.
  3. You cannot apply for PSLF: Only federal student loans are eligible for PSLF, so you cannot apply for loan forgiveness if you refinance your debt.

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Should I refinance my Parent PLUS Loans? 5 times it makes sense

If you’re still not sure if student refinancing is right for you, there are five scenarios where refinancing Parent PLUS Loans can make financial sense:

1. Your loans have a high interest rate

Parent PLUS Loans can have very high interest rates; depending on when you took out the loans, your interest rate could be as high as 7.6%. If you had $28,000 in loans and a 10-year repayment term, that rate would cause you to pay over $12,000 in interest charges over the life of your loan.

If you refinanced your loan and qualified for a 10-year loan at 4.5% interest, you’d pay just $6,823 in interest charges. By refinancing your Parent PLUS Loans, you’d save over $5,000.

  Original Loan Refinanced Loan
Interest Rate 7.6% 4.5%
Loan Term 10 Years 10 Years
Minimum Monthly Payment $334 $290
Total Interest $12,059 $6,823
Total Repaid $40,059 $34,823
Savings: $5,237

2. Your child can afford to take over the debt

When you take out Parent PLUS Loans, you are legally responsible for the loan’s repayment; your child has no legal obligation to repay the loan.

However, there are some cases where your child may be willing and financially able to take over the debt. If that’s the case for you, you and your child can refinance the loans and transfer them into their name. By doing so, your child will be responsible for the loans, and you will no longer have to make payments.

Having your child take over the loans can be especially helpful if you are planning on applying for other types of credit, such as a car loan or mortgage. Without the student loans on your credit report, you are more likely to qualify for a loan and secure a lower interest rate.

3. You took out loans for multiple children

If you had multiple children in college and took out parent loans for all of them, you can have many different loans, loan servicers, monthly payments, and due dates. It can be difficult to manage all those loans, and you could lose track and be at risk of missing a payment.

By refinancing your loans, you can combine all of your loans into one, making it easier to stay on top of your payments and due dates.

4. You want to accelerate your repayment

If you want to learn how to pay off Parent PLUS Loans as quickly as possible, refinancing can be an effective tool. You can refinance the Parent PLUS Loans and get a lower interest rate so more of your monthly payment goes toward the principal rather than accrued interest.

Lenders typically reserve their lowest interest rates for borrowers who refinance and select shorter loan terms. To qualify for the lowest possible rate, opt for a loan term of five to eight years. You’ll get a lower rate than you’d get if you selected a term of 10 years or longer.

The shorter term will allow you to pay off your loans years ahead of schedule — and save thousands.

5. You want to reduce your monthly payments

With a 7.6% interest rate and a 10-year repayment term, your minimum payment for a $28,000 loan would be $334 per month. If you wanted to lower your payments, you could refinance your loans and opt for a longer loan term.

If you refinanced and selected a 15-year term at 6% interest, your monthly payment would decrease to $236 per month — freeing up $98 in your monthly budget.

You’d pay more money in interest charges due to the longer loan term, but that downside may be worth it to improve your cash flow immediately.

Who is eligible for Parent PLUS Loan refinancing?

If you’d like to refinance your parent loans, you have to submit a loan application with a private lender. Lenders will review the following information to determine whether you’re a good refinancing candidate:

  • Credit score: Refinancing lenders typically look for borrowers with good to excellent credit. According to Equifax, one of the three major credit bureaus, a good credit score is a score of 670 or higher.
  • Loan amount: Lenders often have loan minimums and maximums. If you have more than the maximum amount of student loans, you will only be able to refinance a portion of your outstanding debt.
  • Debt-to-income ratio: Your debt-to-income ratio is the number of monthly payments you have to make relative to your gross income. The lower your ratio, the better; lenders want to ensure you have enough extra income to cover your payments.
  • Income: Lenders usually have income requirements for all borrowers. If you’re married, your spouse can cosign the loan, and the lender will then look at your spouse’s income as well as your own.
  • Degree: If your child didn’t graduate from college, you may not be able to refinance your loans. Some lenders require the student to have earned their degree.

Transferring loans

If you plan on transferring the loans to your child, your child will have to meet the lender’s borrower requirements on their own. That means they’ll have to earn enough income — and have a high enough credit score — to qualify for a loan.

Co-signers

While lenders have credit score and income requirements, you may still be able to qualify for a loan if you fall short of their criteria. To improve your chances of getting approved, consider asking a friend or relative with excellent credit to cosign your loan application. Cosigned applications are more attractive to lenders since they have less risk, so you’re more likely to get a loan — and get a lower interest rate than you’d get applying solo.

Cosigning a loan is a big commitment since cosigners are legally responsible for the loan payments if you fall behind. However, it doesn’t have to be a permanent commitment. Many lenders offer cosigner releases; after making your payments on time for a specified period, you can apply to have the cosigner removed from the loan.

Lenders that refinance Parent PLUS Loans

Not all refinancing lenders will work with Parent PLUS Loan borrowers. Even among those that do, only some allow parents to transfer their loans to their children.

If you’re looking for a lender, here are the top companies that offer Parent PLUS Loan refinancing:

  • College Ave: College Ave offers refinancing loans with variable and fixed interest rates. You can choose a repayment term as long as 20 years.
  • Earnest: Unlike other lenders, Earnest allows you to refinance your parent loans before your child has graduated; you can qualify as long as your child is in their last semester of their program. The lender offers fixed and variable rates, and has loan terms as long as 20 years.
  • ISL Education Lending: ISL Education Lending only offers fixed interest rates on refinancing loans. It allows borrowers to refinance up to $300,000 in student loan debt.
  • PenFed Credit Union: PenFed is one of the few lenders that allows parents to transfer their loans to their children through refinancing. And, it offers both fixed and variable interest rates.
  • Education Loan Finance (ELFI): ELFI is another lender that does allow parents to transfer their loans into their child’s name by refinancing. ELFI also offers no maximum loan amount.

  College Ave Earnest ISL Education Lending PenFed Credit Union Education Loan Finance (ELFI)
Allows You to Transfer Loans to Child No No No Yes Yes
Terms 5 – 20 years 5 – 20 years 5 – 20 years 5 – 15 years 5 – 20 years
Loan Limits $5,000 to $300,000 for those with medical, dental, pharmacy, or veterinary degrees ($150,000 for all other degrees) $5,000 to $500,000 ($10,000 to $500,000 in California) $5,000 to $300,000 ($10,000 to $300,000 in California) $7,500 to $300,000 $15,000 to No Maximum Loan Limit

How to refinance Parent PLUS Loans in 7 steps

While the idea of refinancing your Parent PLUS Loans may seem overwhelming, it’s actually a fairly simple process. You can refinance your loans in just seven simple steps:

  1. Think about your goals: Before you start researching lenders, think about your financial goals for refinancing. For example, you may want a lower payment, to pay off your debt as quickly as possible, or transfer your loans to your child. Your goals will affect what lenders are a good match for you.
  2. Boost your credit: To get the best interest rates, try to improve your credit as much as you can ahead of time. Make all of your payments on time, pay down the balances on your credit cards, and limit new credit inquiries to increase your credit score.
  3. Consider adding a cosigner: If your credit is less-than-perfect or if you don’t meet lenders’ income requirements, ask a friend or relative that has a stable job and good credit to cosign your loan application.
  4. Collect documentation: When you refinance, you’ll be asked for your employment information, income, and will need to submit a copy of your ID. You’ll also need your loan account numbers and current balances.
  5. Compare rates: Before submitting your application, get quotes from multiple refinancing lenders. Rates and terms can vary between lenders, so getting several quotes will help you find the best deal.
  6. Complete the application: Most refinancing applications can be completed entirely online, and usually only take a few minutes to fill out. Once you submit it, you’ll typically receive a response quickly; depending on the lender, it could be a few minutes or a day or two.
  7. Continue making payments: Once you’re approved, continue making payments on your existing loans until you receive a notification that the refinanced loan has been disbursed and the loans paid off.

Finding a lender

If you’re not sure when to consolidate Parent PLUS Loans, keep in mind that interest rates are at historic lows right now. You can secure a much lower interest rate than you have now and save thousands over the life of your loan.

If you decide to refinance your debt, you can use the Compare Rates tool to get multiple quotes from top refinancing lenders at once. It’s just one simple form, and there’s no impact on your credit score.

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