Student Loan Refinancing
How to Pay off Student Loans Fast
Managing Your Student Loan Debt
Parent PLUS Loan Refinancing
Why Parents Should Refinance Student Loans
How to Refinance Parent Student Loans
Parent’s Guide to Student Loans
When to Apply for Private Loans
How to Pay for College Tuition
Applying for Student Loans Guide
Student Loan Process Checklist
Student Loan Refinance 101
Student Loan Glossary
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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.
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.
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.
If you’re overwhelmed by Parent PLUS Loans, there are a few different strategies you can use to make your debt more manageable.
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.
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.
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.
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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If you’re thinking about refinancing your Parent PLUS Loans, there are some advantages and drawbacks to consider:
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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:
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.
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.
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.
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.
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.
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:
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.
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.
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:
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:
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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