As a parent, it’s natural to want to help your child succeed. But Parent PLUS Loan debt can be incredibly burdensome, especially as you near retirement.
Parent PLUS Loans often have the highest interest rate of any federal student loan option, making them difficult to pay off early. That high interest rate and additional debt can also drain your monthly finances and stall major life plans like buying a new home or finally retiring.
But how do you ditch your pricey PLUS loans faster than expected? And can you transfer a Parent PLUS Loan to a student? Here’s what you should know.
Can a Parent PLUS Loan be transferred to a student?
The best way to transfer a Parent PLUS Loan to a student is through student loan refinancing.
Refinancing allows you to take out a new loan from a private lender for the total amount of your student debt — including federal loans like Parent PLUS Loans and other private student loans.
With refinancing, you have complete control over choosing a fresh interest rate and repayment term that works for your needs from one of the different lenders you qualify for.
Additionally, some lenders offer an excellent extra perk — the ability to transfer your PLUS loans to your student. By picking a lender, such as PenFed Credit Union, that offers Parent PLUS Loan transfers, you’ll have the opportunity to completely ditch that debt immediately and conveniently.
Once the loans are out of your name, you’ll no longer be obligated to repay them. This can take a serious load off your monthly expenses as well as your credit history — freeing you up financially to pursue other life goals like a new mortgage or saving for retirement.
The flip side is that these loans will need to be put into your child’s name, which gives them the burden of the debt instead and full responsibility to make on-time payments.
If your child has the means to successfully handle your Parent PLUS payments, this strategy can be an excellent way for them to take charge of their education and start building up a credit history.
There are, however, some considerations to keep in mind before you begin the process. And depending on the situation, it might not even be possible.
When does transferring your loans make sense?
Deciding to transfer possibly tens of thousands of dollars of debt into your child’s name can feel like a big undertaking. But in certain situations, it makes a lot of sense.
You can’t afford the monthly payments and meet other financial goals
As you near retirement age, the pressure to have enough saved up will continue to mount. And unfortunately, there’s no such thing as retirement loans. If you’re having trouble setting enough money aside to achieve your retirement goals, staying the current course could cause you to have to work longer, live on a lower monthly income or even both.
In contrast, while student loan debt can be burdensome to your child, they have more time to prepare for the future financially, and they may be able to make it work more easily.
Your child can afford the monthly payments
Depending on your child’s career path, starting salaries after graduation can be all over the place. If you want to transfer your Parent PLUS Loans to your student, but they can’t afford the monthly payments, it’ll be tough to make it happen. This is primarily because, unlike federal student loans, private student loans don’t come with income-driven repayment plans.
So if you transfer the debt and your child can’t keep up, it could damage their credit and financial footing.
As a result, transferring the debt generally only makes sense if your child’s income and job situation are stable enough that they can keep up with the monthly payments going forward.
This was the plan from the beginning
Because undergraduate students can qualify for cheaper student loans than parents, the hope is that you only borrowed Parent PLUS Loans to bridge the gap between what they could qualify for with federal loans and what they needed to attend school.
If you made a plan at that point to transfer the debt to them once they graduate, there won’t be any surprises. But if you were planning on paying off the debt then changed your mind, springing tens of thousands of dollars in student loans on your child could damage your relationship with them.
Keep in mind, too, that in order for you to transfer the debt to your child, they need to agree to accept it.
What if my child isn’t ready to take on the debt?
You may have a student who recently graduated and hasn’t gained much job experience yet — meaning they might not have a lot of expendable cash. If that’s the case, your child may not be ready to take on additional debt and more monthly payments. Alternatively, your child may not yet have had a chance to build their credit history, so they’re unlikely to qualify for refinancing on their own.
Unfortunately, in this case, you’re still legally responsible for paying the debt, regardless of what you agreed on when you first took out the loans.
Once they see a bump in their paychecks, the circumstances could change, and transferring your debt could be a more realistic possibility. Until then, here are some other avenues you can pursue to reduce the burden of the debt on your financial well-being.
Offer to cosign the loan
When you transfer Parent PLUS Loan debt to your child, they must meet the student loan refinance company’s eligibility requirements. If they haven’t had the chance to build their income or credit history enough, that may be difficult or even impossible.
However, you could offer to cosign the loan. Cosigning won’t release you from your legal obligations — while your child will be the primary borrower, if they stop making payments, you’re still legally responsible for paying the debt.
As a cosigner, you’ll also continue to have the debt on your credit reports, which could continue to impact your ability to get credit when you need it.
But going this route can be a temporary solution while your child gets on their feet financially. And if they can afford the monthly payments, it will relieve you of that burden.
When your child is ready, they can refinance the loan again in their name only. Alternatively, some private lenders offer cosigner release, which allows your child to remove you from the loan once they meet certain payment and creditworthiness requirements.
Get on an income-driven repayment plan
Parents with federal student loans can qualify for the Income-Contingent Repayment (ICR) plan once they consolidate their loans. Your monthly payment on the ICR plan is the lesser of 20% of your discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income.
Your discretionary income in this calculation is the difference between your annual income and the poverty guidelines for your state of residence and family size.
The ICR plan also extends your repayment term to up to 25 years, after which the remaining balance is forgiven. Hopefully, you won’t end up with the debt for that long. But if budget constraints are your top issue, this repayment plan can be a solution.
Look into student loan forgiveness
As with the ICR plan, parents can also qualify for the Public Service Loan Forgiveness program, PSLF for short, if they consolidate their loans through the Direct Loan Consolidation program.
With PSLF, you can obtain forgiveness of the full balance of your student loans if you meet the following criteria:
- Work full-time for a qualifying employer, which includes government organizations at any level and not-for-profit 501(c)(3) organizations. Volunteers for AmeriCorps and Peace Corps are also eligible.
- Get on an income-driven repayment plan — for parents, that’s the ICR plan.
- Make 120 qualifying monthly payments.
With this type of forgiveness, it’ll take about 10 years, which is 40% the amount of time required to get forgiveness through the ICR plan.
Refinance the student loans on your own
If you don’t necessarily need an income-driven repayment plan and don’t qualify for forgiveness, refinancing the student loans on your own can still have some positive benefits:
- Score a much lower rate: Parent PLUS Loan interest rates can be high, and depending on your creditworthiness and income, you may be able to get a lower interest rate than what you currently have. A lower rate can reduce not only your monthly payments but also your total interest charges over the life of the new loan.
- Shorten your repayment term: The shortest repayment term for Parent PLUS Loans is the standard repayment term at 10 years. If you want to eliminate the debt as quickly as possible and have the cash flow, you could get a term as short as five years through refinancing.
- Lengthen your repayment term: If you’re looking to lower your monthly payment but can also get a lower rate, opting for a longer term through refinancing could be a good alternative to the Income-Contingent Repayment plan. With a private lender, you can often get a loan repayment term as long as 20 years. Lowering your payment can relieve some pressure on your budget and also lower your debt-to-income ratio, which can come in handy when you need to apply for credit. Keep in mind, though, that extending your term usually results in more total interest charges.
- Simplify your repayment: If you have both federal and private parent student loans, refinancing all of them into one new loan combines multiple monthly payments into one. Even if you only have federal loans, it’s possible that you have more than one loan servicer. In both cases, cutting the number of payments that you need to keep track of can make things a little less stressful.
With a good income and credit score, refinancing could be a smart solution to better manage your Parent PLUS Loans in a way that works best for your finances.
How does refinancing a Parent PLUS Loan affect credit?
If you manage to transfer the Parent PLUS Loans to your student, the loans will be marked as paid in full on your credit reports. Because you’ll no longer be making payments, you may see your credit score dip slightly. But as long as you continue to use credit responsibly, it shouldn’t be a concern.
If you decide to refinance on your own for the foreseeable future, though, it’s also important to know how that can affect your credit score.
Just about any time you apply for credit, the lender will run a hard inquiry on one or more of your credit reports. According to FICO, though, the impact of a hard inquiry is low and temporary — each additional inquiry knocks fewer than five points off your score.
The good news is that you don’t have to submit applications to a bunch of refinancing lenders to find out which one will give you the best offer. Instead, they typically offer a prequalification process, which requires a soft credit check that doesn’t impact your credit score and allows you to view rate offers based on the information the lender finds.
Of course, this isn’t a final offer. You’ll get that once you submit an official application and the lender runs a hard credit check. But the rate quote is still a valuable piece of information that you can use to compare lenders without commitment or impact to your credit score.
Once the process is complete, there will be no change in how much you owe or the fact that you have to make monthly payments, so as long as you keep up with your payments, that positive history can help improve your credit score over time.
Is student loan refinancing right for you?
Refinancing your Parent PLUS Loans in your child’s name can make a huge positive impact on your financial situation. It frees up money that you can use to work toward your financial goals and makes it easier for you to make sure you’re prepared for retirement.
As a result, if your child can manage to take on the debt, there are very few (if any) negative ramifications for you as the parent.
If you’re considering refinancing the loans on your own, there are several things to consider before you decide to pull the trigger:
- What you might lose: Refinancing federal student loans is irreversible. If you qualify for loan forgiveness or think you might need access to the ICR plan, refinancing may not be the best idea. If not, you can proceed.
- What your income and job situation look like: Once you’re locked into a payment plan with a private lender, there isn’t as much flexibility as with federal loans. If you have reason to believe your job security isn’t strong, consider sticking with your federal loans.
- How much you can save: Your interest rate on the new loan will depend on your creditworthiness. This means that there’s no guarantee that you’ll get a better interest rate than what you have right now. If the savings are negligible or nonexistent, consider taking time to improve your credit before you apply.
- What else you stand to gain: While most people refinance to save money, you may also want to move forward with it to have the ability to choose how long you want your repayment plan to be or to work with a lender that offers features that you want. Think beyond the interest rates to determine if you can get a better arrangement than the one you have.
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How to transfer Parent PLUS Loans to a student through refinancing
Once you and your child have agreed to begin the process of transferring your debt to their name, here are a handful of steps to follow to complete the agreement.
1. Compare student loan refinance interest rates
Shopping around is the best way to maximize the savings that your child will get through refinancing. As previously mentioned, student loan refinance companies typically let you get prequalified before you submit a full application through their website.
Prequalification requires just a soft credit check, which won’t impact your child’s credit score. With it, they’ll be able to view an initial quote, which can give them an idea of what to expect when they officially apply.
It can be a pain going through the prequalification process with multiple lenders individually, so consider using Purefy’s rate comparison tool. It allows you to get prequalified with multiple lenders at once and compare their offers side by side.
2. Pick a lender
After you’ve compared interest rates, you’ll want to check to see which lenders allow transfers of Parent PLUS Loans to students. You’ll also want to look at other features, such as customer satisfaction, interest rate discounts and other things that are important to you.
If you’re planning to cosign the loan to help your child get approved, check for a cosigner release program, or at least discuss how to get you removed from the loan when your child is ready.
4. Submit an application
You can either visit the lender’s website directly or click through from the Purefy rate comparison tool to be directed to its website. From here, you can begin your online application.
During the application process, your child will need to provide some personal information, such as their full name, Social Security number and date of birth. They’ll also need to provide contact information, as well as information about the student loans — you can get the payoff amounts, which tell the lender how much you need to borrow with the new loan, from your current loan servicers.
In most cases, they’ll also need to provide certain documents, such as a copy of a government-issued ID to prove their identity and income documents to show how much they earn. Check with the lender beforehand to find out which documents they’ll need, so you can complete the application process quickly.
5. Sign the documents and start saving
Once your application has been submitted, the lender will run a hard credit check on the applicant — and also you as the cosigner, if applicable — to determine whether to approve the application and what the terms will look like.
If your child decides to accept the offer, they’ll sign the loan agreement, which they can do online, and the lender will pay off your loan directly.
That said, make sure you continue to make payments until you get confirmation that the loans have been paid in full. If you overpay, you should receive a refund check in the mail. Encourage your child to set up automatic payments to avoid missing a payment. Also, many lenders offer interest rate discounts for autopay, so that’s another reason to make it a priority.
The Bottom Line
Making a direct Parent PLUS Loan transfer to a student is possible through refinancing. However, the situation may not always be cut-and-dry. Before you start pursuing refinancing, talk with your child about the arrangement and make sure they’re on board.
You’ll also want to discuss the credit and income requirements to get an idea of whether they can get approved without your help as a cosigner.
Once you’ve decided to proceed, take the above steps to ensure a smooth transition of the debt. That said, if your child can’t afford to take on the debt or their creditworthiness is in question, there are some options you can pursue to make the loans less of a burden on you and your financial situation.
As with all financial decisions, it’s crucial that you take the time to research and consider all of your options. None of them is inherently better than the others, so it’s important to know what you want to do with the loans and which choice will give you the best results.