Each year, millions of parents take out federal Parent PLUS Loans to help their children pay for their college education. Unlike other types of federal loans, there are no caps on how much you can borrow with Parent PLUS Loans; you can borrow up to the total cost of attendance at your child’s school.
While helping your kids with their college expenses is a wonderful thing to do, it can cause you to rack up a substantial amount of debt. And with high interest rates, your loan balance can grow over time.
If you’re trying to pay off the loans as quickly as possible, you might be wondering, “Should I refinance Parent PLUS Loans?” Student loan refinancing is a strategy for managing your debt, and it can be a particularly effective method for Parent PLUS Loan borrowers.
Why refinancing makes sense for Parent PLUS Loan borrowers
As of 2020, there are 3.6 million Parent PLUS Loan borrowers with over $100.8 billion in outstanding loans.
Parent PLUS Loans are the most expensive of all federal loans. They have disbursement fees — 4.228% as of October 2020 — but they also have the highest interest rates of all loan types.
The federal government recently slashed student loan interest rates. Parent PLUS Loans disbursed after July 1, 2020 and before July 1, 2021 have an interest rate of 5.75%, a significant reduction from previous years.
However, the new interest rate only applies to current borrowers. If you took out loans before July 1, 2020, you’ll have to pay the higher interest rate you agreed to on your loan promissory note. Depending on when you took out the loan, the rates can be quite high, with some borrowers paying as much as 7.9% interest.
|Loan Disbursement Date||Interest Rate|
|July 1, 2019 – June 30, 2020||7.08%|
|July 1, 2018 – June 30, 2019||7.6%|
|July 1, 2017 – June 30, 2018||7%|
|July 1, 2016 – June 30, 2017||6.31%|
|July 1, 2015 – June 30, 2016||6.85%|
|July 1, 2014 – June 30, 2015||7.21%|
|July 1, 2013 – June 30, 2014||6.41%|
|July 1, 2006 – June 30, 2013||7.9%|
With such high interest rates, student loan refinancing can be an excellent way to handle your debt. If you have good credit, you may qualify for a loan with a lower interest rate, making it easier to repay your loan.
Should I refinance Parent PLUS Loans?
When you refinance your Parent PLUS Loans, you take out a loan from a private lender for the amount of your existing debt. The loan has different terms, including interest rate and monthly payment.
While student loan refinancing has some drawbacks for federal loan borrowers, it can be well worth the tradeoff. You’ll no longer be eligible for an income-driven repayment plan or Public Service Loan Forgiveness, but not everyone qualifies for those programs. And, by refinancing, you can enjoy these potential benefits:
1. You can save money
The reason that student loan refinancing is so popular is that it can help you save a significant amount of money. With a lower interest rate, less interest will accrue, allowing you to pay less over time. Just how much can you save?
Let’s say you took out $30,000 in Parent PLUS Loans in 2018, giving you an interest rate of 7.6%. If you made the minimum payments for the entire 10-year repayment term at that interest rate, you’d pay $12,921 in interest charges on top of the amount you originally borrowed.
If you refinanced your loans and qualified for a 10-year loan at just 4.75%, you’d pay just $7,745 in interest charges. Taking a few minutes to refinance your Parent PLUS Loans would allow you to save over $5,000.
|Original Loan||Refinanced Loan|
|Loan Term||10 Years||10 Years|
|Minimum Monthly Payment||$358||$315|
|Total Savings: $5,176|
2. You can pay off your debt faster
If you’re trying to figure out how to pay off Parent PLUS Loans quickly, refinancing can be a smart solution.
When you refinance and qualify for a lower rate, your monthly payment will likely drop, too. While you can make the lower payment and pay off the loan according to its loan term, a way to accelerate your debt repayment is to continue making the minimum payment you had before you refinanced. Thanks to refinancing to a lower rate, more of your payment will chip away at the loan principal, and you can pay off your loan months or years early.
For example, if you had the above student loans and refinanced and qualified for a 10-year loan at 4.75% interest, your monthly payment would be $315 instead of $358. But if you continued paying the extra $43 per month, you’d pay off your loans in under nine years. And, you’d save an additional $1,208 in interest charges.
3. You can reduce your monthly payment
If you cannot afford your current monthly payments, student loan refinancing can give you some relief. When you refinance, you can decide to extend your repayment term. With a longer term, you’ll pay more in interest charges over time, but you can significantly reduce your minimum monthly payments.
For instance, if you had $30,000 in loans and a 10-year term at 7.6% interest, your minimum monthly payment would be $358. If you refinanced and qualified for a 15-year loan at 7% interest, your monthly payment would be just $270 per month, freeing up $88 each month for your other expenses.
Repaying Parent PLUS Loans more easily
Now that you know how to refinance Parent PLUS Loans and the benefits of refinancing, you can research the best options for you. Use Purefy’s Compare Rates tool to get quotes from top refinancing lenders to help you find the best interest rate and loan terms.