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Should You Refinance Parent PLUS Loans?

Kat TretinaPublished on

should you refinance parent plus loans

As a parent, you want the very best for your children. That often means a quality education. With college costs skyrocketing, parents are increasingly turning to student loans to help their children pay for school. In fact, the Brookings Institute found that over 3.4 million people have taken out Parent PLUS Loans, a type of federal loan designed specifically for parents.

Having Parent PLUS loans under your name can be a serious burden. With high interest rates, the loans can be expensive and difficult to repay. Refinancing Parent PLUS Loans can be a smart strategy, but it’s not for everyone. Here’s what you need to know before you refinance Parent PLUS Loans.

What is student loan refinancing?

Student loan refinancing is a process in which you work with a private lender to take out a loan that covers the cost of your current debt. The new loan is completely different than your old ones. It will have a new repayment term, interest rate, and monthly payment. And, if you had multiple student loans before, you’ll have just one loan and one monthly payment going forward after refinancing.

Refinancing Parent PLUS Loans

Parent PLUS Loans have the highest interest rate of any federal student loan. As of July 1, 2019, Parent PLUS Loans are at 7.08%. With such a high rate, your student loan balance can quickly balloon and you could end up repaying far more than you originally borrowed. That’s why refinancing Parent PLUS Loans can make a lot of sense.

Benefits of refinancing Parent PLUS Loans

Refinancing Parent PLUS Loans has several key benefits:

1. You can refinance the loans into your child’s name

If you took out Parent PLUS Loans to help your child pay for school, those loans are entirely in your name. That means you’re solely responsible for repaying them. And, having them on your credit report can affect your ability to qualify for other forms of credit, such as a mortgage.

If your child is doing well in their career and is earning enough money to take over the loans, you may be able to transfer the loans into their name through student loan refinancing. If you use this strategy, your child will then be responsible for the loan, and you are no longer obligated to repay the debt.

2. You can save money

Parent PLUS Loans have the same high interest rates for everyone, regardless of your credit score. If you have good credit, refinancing can help you save money because you may be able to qualify for a lower interest rate.

For example, let’s say you had $30,000 in Parent PLUS Loans at 7.08% interest and a 10-year repayment term. Over the course of your repayment, you’d pay a total of $41,948.

However, if you refinanced your loans and qualified for a 10-year loan at 5% interest, you’d repay just $38,184. By simply refinancing your debt, you’d save over $3,700. 

 

Original Loan at 
7.08% Interest

Refinanced Loan at
5% Interest

Loan Amount

$30,000

$30,000

Repayment Term

10 years

10 years

Monthly Payment

$350

$318

Total Interest Paid

$11,948

$8,184

Total Repaid

$41,948

$38,184

3. You can reduce your monthly payment

If you’re struggling to afford your payments, refinancing can help with that, too. When you refinance, you can opt for a longer repayment term, reducing your monthly payments.

If you had $30,000 in student loans at 7.08% interest and a 10-year repayment term, your minimum monthly payment would be $350.

If you refinanced your loans, kept your same interest rate, but extended your repayment term to 15 years, your payment would drop to $271. Refinancing would free up an extra $79 per month in your budget.

Extending your repayment term can cause you to pay more in interest over time, but it may be worth it to you to get some extra breathing room each month. 

Drawbacks to refinancing Parent PLUS Loans

While refinancing can be a powerful tool for managing your student loans, there are some drawbacks to consider:

1. You’ll lose access to income-driven repayment plans

Parent PLUS Loans aren’t eligible for income-driven repayment plans unless you first consolidate them with a federal Direct Consolidation Loan. Once you do so, you can sign up for an income-contingent repayment plan. Under this plan, your repayment term is extended and your monthly payment capped at a percentage of your income. With this approach, you can dramatically reduce your monthly payment.

However, your loans become private loans once you refinance Parent PLUS Loans. That means you’re no longer eligible for any income-driven repayment plan.

2. You will not be able to enter into federal deferment or forbearance

If you face a financial hardship, such a job loss or medical emergency, federal loans offer deferment or forbearance options. These perks allow you to postpone making payments while you get back on your feet, without your loans going into default.

However, your loans are no longer eligible for federal deferment or forbearance programs once you refinance. Some private refinancing lenders do offer programs in cases of financial hardship, but not all do.

3. You’ll no longer qualify for Public Service Loan Forgiveness

If you work for a qualifying non-profit organization or government agency, you may be eligible for Public Service Loan Forgiveness (PSLF). Under this program, the government discharges your loan balance after you make 10 years of qualifying payments while working for an eligible employer. Unfortunately, your loans no longer qualify for PSLF once you refinance them.

If you’re considering student loan refinancing for Parent PLUS Loans, make sure you consider these drawbacks before you make a decision. In some cases, the benefits may outweigh the consequences, making refinancing a smart decision.

Refinancing requirements for parents

To be eligible for Parent PLUS Loan refinancing with one of Purefy’s lenders, you must meet the following criteria:

  • Have a strong credit history
  • Have at least one outstanding education loan
  • Have steady income

Qualified borrowers may be able to get a significantly lower rate than they currently have on their Parent PLUS Loans. However, the interest rate and terms you’re offered is dependent on your creditworthiness, meaning your credit score, income, and debt-to-income ratio.

How to find the best refinancing lenders

If you’re dealing with Parent PLUS Loans, student loan refinancing can be a useful strategy to help you save money, reduce your monthly payment, or even to transfer them to your child. If you decide to refinance Parent PLUS Loans, use Purefy's rate comparison tool to view offers from multiple lenders at once and find the best rate.