Parent PLUS Loan Forgiveness Options & Alternatives
May 8, 2019
Here’s what you need to know about Parent PLUS loan forgiveness and other repayment alternatives, if you are struggling to afford your payments.
As a parent, you want the best for your child. Often, that means contributing to your child’s education. If you don’t have enough money saved for college, you likely turned to student loans to fill the gap.
You’re certainly not alone. According to Mark Kantrowitz, publisher at SavingforCollege.com, families with a student who graduated with a bachelor’s degree and borrowed from the direct Parent PLUS program had an average of $32,596 in Parent PLUS loans.
With so much debt, it can be hard to make ends meet, let alone save for other goals like retirement. In this guide to Parent PLUS repayment, we'll take a look at your options and alternatives.
What are Parent PLUS loans?
Parent PLUS loans are a form of federal student loan for biological or adoptive parents who want to borrow money to pay for their child’s education. With Parent PLUS loans, you can borrow up to the total cost of attendance at the school your child attends.
Unfortunately, Parent PLUS loans have the highest interest rates of any federal student loan. For loans disbursed between July 1, 2018 and before July 1, 2019, the interest rate is 7.6%. With such a high rate, your loan balance can quickly balloon. You will probably end up paying back far more than you originally borrowed.
Parent PLUS loan forgiveness options
Repaying your loans can be an immense struggle and a strain on your finances. Luckily, there are two Parent PLUS loan forgiveness options.
Forgiveness through income-contingent repayment
If you can’t afford your payments, one option is to apply for an alternative Parent PLUS loan repayment plan, such as income-contingent repayment (ICR). Under an ICR plan, your payments are capped at 20 percent of your discretionary income, or what you would pay with a fixed repayment period of 12 years, whichever is less.
While Parent PLUS loans aren’t eligible for ICR, there is a way around this rule. If you consolidate your Parent PLUS loans with a Direct Consolidation loan, you can then enter into an ICR plan, reducing your payments.
Once you’re on an ICR plan, you’re eligible for Parent PLUS loan forgiveness after 25 years of making payments. Once that 25 years is up, the remaining balance on your loans is discharged. That’s a long time to wait for loan forgiveness, but it can give you substantial relief during your repayment period.
One thing to keep in mind is that the forgiven balance under ICR forgiveness is taxable as income. While forgiveness can provide you with significant savings, you should plan for a large tax bill.
Lastly, the bottom line on Income-Contingent Repayment is that you are likely to pay more over time than you would have on the standard 10 year repayment plan. As such, we only recommend this option for borrowers that are seriously struggling to make payments.
Public Service Loan Forgiveness
Through Public Service Loan Forgiveness (PSLF), you can get your remaining loan balance forgiven after making ten years of qualifying payments while working for an eligible employer, such as a non-profit organization or government agency.
However, Parent PLUS loans aren’t eligible for Public Service Loan Forgiveness as they are. Instead, you have to consolidate them with a Direct Consolidation Loan, first. Then, you have to apply for an ICR plan.
Once on an ICR plan, your payments will count towards the 120 necessary payments you have to make before you qualify for loan forgiveness.
Unlike ICR forgiveness, the forgiven balance under PSLF is not taxable as income, so the savings can be even greater.
PSLF is a good option for parents who have established careers in public service and won’t be retiring or moving to the private sector in the next decade.
Refinancing Parent PLUS loans
Parent PLUS loan forgiveness isn’t an option for everyone. You may not work for a qualifying non-profit, or 25 years may simply be too long to wait. If that’s the case and you still need help with repaying your student loans, another option to consider is refinancing your Parent PLUS loans.
With this approach, you work with a private lender to take out a new loan for the amount of your Parent PLUS debt. The new loan has completely different terms, including interest rate, monthly payment, and repayment term.
When you refinance, your federal student loans become private ones. That means you’ll lose out on certain federal benefits, like access to Income-Contingent Repayment or the ability to enter your loans into federal forbearance. However, refinancing your student loans has three major benefits:
1. You can lower monthly payment
When you apply for a student loan refinance, you could qualify for a lower interest rate. Or, you could opt for a loan with a longer repayment term. Either option (or both at the same time) can reduce your monthly payment, giving you more breathing room in your budget.
For example, say you have $30,000 in PLUS loans at 7.6% interest and 10 years left on your repayment term. Under these terms, your monthly payment would be $358 per month. If you refinanced your loans and qualified for a 5% interest rate and extended your repayment term to 15 years, your monthly payment would be just $237. By refinancing, you’d reduce your payment by $120 a month.
In this example, you might think that by pushing out your repayment by an extra five years, you might pay more over time in interest. But in fact, the opposite is true. Because of that new, low interest rate on your Parent PLUS refinance, you’ll actually save about $218 in interest over the life of the loan.
2. You can save money
If you qualify for a lower interest rate by refinancing your Parent PLUS loans, it can help you save a significant amount of money. More of your payment goes toward the principal rather than interest, helping keep more money in your bank account.
If you have $30,000 in Parent PLUS Loans at 7.6% interest and took ten years to repay your loans, you’d pay a total of $42,921. Interest charges would cost you nearly $13,000.
However, if you refinanced your loans and qualified for a 5% interest rate and a ten-year loan, your total would be much less. Over the course of ten years, you’d repay just $38,184. Taking a few minutes to apply for a refinancing loan would help you save over $4,700—and lower your payment by $40 a month at the same time.
Use the Purefy rate comparison tool to find out how much you can save on your Parent PLUS loans. Our easy-to-use tool lets you compare your rates from multiple lenders, helping you maximize the savings on your refinance.
3. You can transfer loans to your child’s name
With federal Parent PLUS loans, the parent is solely responsible for repaying the debt. There’s no way to transfer the student loans to the child.
If your child is doing well financially and wants to take over liability for the loans, there’s one workaround: refinancing. With certain lenders, when your child applies for a refinancing loan, they can include your Parent PLUS loans. The refinancing process will transfer the Parent PLUS loan to the student, removing your obligation. Going forward, the child is responsible for the debt, and it will no longer affect your credit report.
The bottom line
Dealing with Parent PLUS loans can be overwhelming and expensive. However, there are ways to make your debt more manageable. In some cases, you may be eligible for loan forgiveness, eliminating the need to repay the loans. And, if you don’t qualify, there’s always student loan refinancing, which can make your payments more affordable. By researching your options and choosing the best repayment plan for you, you can minimize the loans’ impact on your finances.