There’s no getting around it: Parent PLUS Loans are a big problem, and they’re becoming increasingly common. The New York Times reported that Parent PLUS Loans account for nearly 25% of new federal borrowing for undergraduates, and they have fewer protections than other federal student loans. While the average amount borrowed by parents is $24,416, many parents borrow significantly more, putting their financial security at risk.
Refinancing your Parent PLUS Loans can give you substantial relief, allowing you to save money, pay off your debt more quickly, or even transfer your loans to your child. If you decide to refinance Parent PLUS Loans, here’s what you should know first.
Why Parent PLUS Loans are the literal worst
If your child is in college and needs help paying for school, federal loans are a good place to start. Your child can take out loans in their own name, and they don’t require a credit check.
But there’s a catch: there’s a limit on how much your child can borrow per year and over their lifetime. That’s where Parent PLUS Loans come in.
Parent PLUS Loans don’t have annual or lifetime maximums, so you can borrow up to the total cost of attendance of your child’s program. However, that’s not always a great solution.
When it comes to federal student loan options, Parent PLUS Loans are the worst of the lot. They have significant drawbacks, including:
They have high interest rates
While federal student loans tend to have low interest rates, Parent PLUS Loans are the exception. For loans disbursed on or after July 1, 2021 through June 30, 2022, the interest rate on Parent PLUS Loans is 6.28%. In the past, interest rates on Parent PLUS Loans have been as high as 7.9%.
With such a high rate — and interest starts accruing right away — your loan balance can grow out of control.
Did you know? Student loan refinance rates are at historical lows
Lowering your interest rate is the easiest way to save on student loan debt. You can refinance to a shorter term and get out of debt faster.
Takes 2 minutes • No impact on credit
You’ll have to pay disbursement fees
In addition to high rates, Parent PLUS Loans also charge disbursement fees. The fee is deducted from your loan amount when it’s disbursed, so you receive less money than you actually borrow.
For example, the disbursement fee for loans issued on or after October 1, 2020 through October 1, 2022 is 4.228%. If you took out $20,000 to pay for your child’s college education, you’d actually only get $19,153.50. You would pay $845.60 in disbursement fees, but you’d owe — and pay interest on — the $20,000 you borrowed.
They aren’t eligible for income-driven repayment plans
If you can’t afford your payments, you may be researching your repayment options. Unlike other federal student loans, Parent PLUS Loans aren’t eligible for income-driven repayment (IDR) plans, which base your payments on your discretionary income and an extended loan term.
There is a workaround — you can consolidate your debt with a Direct Consolidation Loan and enroll in income-contingent repayment after that — but your options are much more limited.
They cannot be transferred to your child
Parent PLUS Loans are in the parent’s name. They can’t be transferred to your child as they are. So even if your child wants to take over the debt, the loans will remain in your name and will continue to affect your credit report and impact your finances.
You’re solely responsible for repaying Parent PLUS Loans
Parent PLUS Loans are frequently misunderstood. Some parents take out the loans thinking that they are just co-signing a loan and their child is responsible for repaying them. However, that’s not the case.
When you take out a Parent PLUS Loans, you are the sole borrower; your child has no legal tie to the debt. Even if you have an agreement with your child that they will repay the loan, that agreement isn’t enforceable. If your child fails to uphold their part of the agreement and doesn’t make the payments, the lender will send you to collections, and the late payments can destroy your credit.
Parent PLUS Loans can hurt your retirement
Because Parent PLUS Loan payments can eat up a significant portion of your budget, you may not have enough money left over to save for retirement. That problem can become a huge issue as you age; without enough savings, you’ll struggle to afford the basics in retirement.
Parent PLUS Loans can’t (typically) be discharged in bankruptcy
Student loans, including Parent PLUS Loans, are notoriously difficult to get rid of, even in cases of bankruptcy. While you can file for bankruptcy and get medical bills, credit card debt, and even auto loans discharged, you’ll likely still have to repay your Parent PLUS Loans.
They can affect your ability to qualify for other forms of credit
Since Parent PLUS Loans are solely in your name, they affect your credit score and debt-to-income ratio. If you’re trying to get approved for another form of credit — such as a home loan, car loan, or personal loan — you may not get approved because of the existence of Parent PLUS Loans.
Refinancing Parent PLUS Loans
If you have Parent PLUS Loans and want to eliminate your debt as quickly as possible, consider student loan refinancing. When you refinance Parent PLUS Loans, you may qualify for a lower interest rate, smaller monthly payment, or you may even transfer your debt to your child.
Student loan refinancing is a process that involves borrowing money from a private lender to pay off all or some of your existing student loans. Since refinancing loans are offered by private lenders rather than the government, you can qualify for different terms.
Is Student Loan Refinancing Right for You?
Find out how much you can save with these top lenders
5 Benefits of Refinancing Parent PLUS Loans
If you’re trying to decide if Parent PLUS Loan refinancing is right for you, there are some major benefits to refinancing parent loans to keep in mind:
1. Your child can take over responsibility
While Parent PLUS Loans can’t be transferred to your child in their current state, refinancing provides an invaluable workaround: when you refinance your loans, you can transfer them entirely to your child. Going forward, the loans will only be in your child’s name. You won’t be legally responsible for the payments, and the account will show up as paid in full on your credit report. To put it simply, your debt will disappear overnight.
To transfer Parent PLUS Loans into your child’s name, they must fill out a loan application themselves. They’ll have to meet the lender’s eligibility requirements, including minimum income and credit score limits, to successfully transfer the loan.
2. You can qualify for a lower interest rate
Parent PLUS Loans have very high interest rates, and interest can accrue rapidly. By refinancing your loans, you could potentially secure a lower interest rate and save thousands of dollars.
The rate you receive is dependent on several factors, including:
- The individual lender
- The loan term you choose
- Your credit score
- Your other outstanding debt
Depending on your situation, the advantages of an interest rate reduction can be significant.
For example, Jennifer borrowed $50,000 to pay for her son’s undergraduate education at 6.28% interest. If she took the entire 10-year repayment term to pay off her loans, she would repay a total of $67,459; interest charges would add over $17,000 to her loan’s cost.
Because of the high rate, Jennifer decided to shop around and refinance her loans. She was able to get an interest rate of 4.25% on a 10-year loan. Thanks to the lower rate, she would repay just $61,463. By refinancing her student loans, Jennifer would save nearly $6,000.
|Original Loan at 6.28%||Refinanced Loan at 4.25%|
|Loan Term||10 Years||10 Years|
|Total Savings: $5,997|
To calculate your potential savings, consider your interest rate, remaining loan term, and balance. If you have a high balance and interest rate, your savings could be even more significant.
3. You can pay off your loans faster
By refinancing your loans, you could potentially pay off your Parent PLUS Loans much faster.
When you refinance and get a lower interest rate, more of your monthly payment will go toward the loan principal instead of the accrued interest. You’ll chip away at the principal faster, helping you get out of debt more quickly.
Lenders typically give the lowest interest rates to applicants that opt for shorter loan terms. If you choose a term of five to eight years, you’ll get the lowest possible rates, and get rid of your debt years ahead of schedule.
4. You can reduce your monthly payment
Not everyone wants to pay off their loans as quickly as possible; if you’re on a tight budget or need to free up some cash flow, you may be looking for a way to reduce your payments instead.
When you refinance your loans, you can select a new loan term. Lenders offer loan terms as long as 20 years. With a longer term, you could significantly lower your monthly payments.
For example, if you had $50,000 in student loans at 6.28% interest and a 10-year repayment term, your monthly payment would be $562 per month.
If you refinanced your loans and extended your repayment term, you could get a 20-year loan at 6% interest. With a slightly lower rate and a longer repayment term, your monthly payment would drop to $358, giving you $204 more each month. You’ll pay more in interest, but you may find that drawback is worth it to have more available cash.
5. You will have just one easy payment
If you took out multiple loans — and especially if you took out loans for several children — you likely have several due dates and payments to remember. It can be confusing keeping track of all of your loans. If you want an easier way to manage your debt, student loan refinancing can be very useful. By refinancing your debt, you’ll combine your debt into one new loan, and you’ll have just one payment to make every month going forward.
See How Much You Can Save
Parent PLUS Loan Refinance Calculator
Parent PLUS Loan rates are often the highest of any federal student loan. Calculate your savings with lower rate and see the impact of paying off PLUS loans faster.
Step 3: See How Much You Can Save
|Current Loan||New Loan||Savings|
Like what you see? Check your actual prequalified rates from the industry’s top lenders in just 2 minutes or less.
Downsides of refinancing Parent PLUS Loans
While student loan refinancing can be an effective way to manage your loans, it’s not right for everyone. There are some drawbacks to consider before submitting your loan application:
1. You may not qualify for a loan
When you apply for student loan refinancing, the lender will review your credit report. They typically only lend to borrowers with good to excellent credit. If your credit score is in the poor to fair range, you may not qualify for a loan, or you may get a higher interest rate than other borrowers.
Lenders will also review your debt-to-income ratio, or the amount of your monthly income that goes toward debt. If it’s too high because you have mortgage payments, car payments, or other outstanding debt, you won’t qualify for refinancing.
2. You’ll lose eligibility for federal programs
When you refinance your Parent PLUS Loans, they become private student loans. They will no longer be eligible for federal loan benefits, including:
- Loan forgiveness: Parent PLUS Loan borrowers can qualify for Public Service Loan Forgiveness if they work for a non-profit organization or government office. But once you refinance, you’ll no longer be eligible.
- Income-contingent repayment: Parent PLUS Loans can apply for income-contingent repayment — and get a lower monthly payment — after consolidating their debt with a Direct Consolidation Loan. If you refinance, you can no longer take advantage of this benefit.
- Forbearance or deferment: If you become ill, lose your job, or have another financial hardship, the federal government allows you to postpone your Parent PLUS Loan payments for months or even years. With private loans, some lenders offer financial hardship programs, but they tend to be much shorter in duration than federal forbearance or deferment.
3. Extending your loan term can cause you to pay more
Refinancing your debt and choosing a longer loan term — some lenders offer terms as long as 20 years — can be appealing. You can significantly lower your monthly payment, giving you more cash to work with each month.
However, there’s a downside to that approach. Because your loan will be in repayment longer, you’ll likely pay more in interest charges than if you stuck with your existing loans and a 10-year term.
Lenders typically give borrowers that elect longer terms higher interest rates than borrowers that choose shorter terms, which can also add to your total repayment cost.
When does it make sense to refinance Parent PLUS Loans?
While everyone’s situation is different, there are some scenarios where it would make sense for most borrowers to refinance their debt:
Your child can afford the payments, and is willing to take over the loans
After graduating from college, your child secures a great job and starts earning a healthy income. As they climb the corporate ladder, their financial situation gets even better, and they offer to take over the loans you borrowed to help them pay for their degree.
If that’s the situation for you and your child, refinancing your loans and transferring them into the child’s name is an excellent idea. It frees you from the obligation and stress of repaying the debt.
You are planning to buy a home
If you’re planning on relocating or buying a new home, you likely need to lower your debt-to-income ratio to qualify for a home loan. Refinancing your loans can give you a lower rate or longer repayment term, reducing your monthly payment and improving your debt-to-income ratio in the eyes of the mortgage lender.
You have an interest rate over 6%
If you were one of the unlucky parents who took out Parent PLUS Loans before the government slashed federal loan interest rates, your interest rate could be as high as 7.9%.
If your loan’s interest rate is high — 6% or higher — refinancing can be especially effective for you. Refinancing lenders are offering historically low interest rates. You could qualify for a dramatically lower rate than you have now and save a lot of money over the life of your loan.
How to refinance parent student loans
If you’ve evaluated the pros and cons of refinancing Parent PLUS Loans and decide it makes sense for you, you can move forward with refinancing your debt. Refinancing your loans is a relatively simple process, and it can be completed entirely online in just a few minutes.
To get started, follow these steps:
1. Review eligibility requirements
Eligibility requirements can vary by lender. In general, you must have good to excellent credit, steady income with supporting documentation, and your child must have attended a qualifying university.
Some student loan refinancing lenders only allow you to refinance your Parent PLUS Loans if your child graduated with a degree, but not all have that requirement.
If your child intends to take over the loan, they will have to meet the lender’s requirements on their own and complete a separate loan application.
2. Collect documentation
When you complete the application, the lender will ask for some documentation. You will usually have to provide your Social Security number, a copy of your driver’s license, a recent pay stub or tax return, and the account numbers and current balance for your existing student loans. You can save some time by gathering these documents ahead of time.
3. Shop around
Interest rates, terms, and eligibility requirements vary by lender. Before submitting your application and undergoing a hard credit inquiry — which can impact your credit score — shop around and compare rates from multiple lenders to find the best match for you.
4. Submit your application
Most student loan refinancing applications can be filled out and submitted online. Make sure you read the fine print carefully before signing; online applications are legally binding.
Once your application is submitted, you’ll receive a notification from the lender about whether you’ve been approved or not. Depending on the letter, you could receive a notification right away, or it may be a few business days.
5. Continue making payments
If you’re approved for a loan, continue making the required monthly payments on your current loans until you’ve gotten a notification from the refinancing lender that your new loan has been disbursed and the old ones paid off. Otherwise, you risk incurring late fees or damaging your credit due to late payments.
That’s it! Five easy steps and you can more effectively manage your parent student loans.
Should I refinance Parent PLUS Loans?
If you’re trying to decide whether refinancing your Parent PLUS Loans makes sense or not, carefully consider your current financial situation and your future goals. With high interest rates, Parent PLUS Loans can be an expensive way to help your child pay for school. By refinancing, you could save money, pay faster, or even get out of paying them altogether if your child is willing to take them over.
Right now, parent loan refinancing rates are quite low. Depending on the lender, your credit score, and the loan term you choose, you could qualify for variable interest rates as low as 1.88%. If you select a fixed interest rate, rates start at 2.50%.
When you’re ready to refinance your loans, use Purefy’s Compare Rates tool to get rate quotes from top parent loan refinancing companies. You can fill out just one form and get multiple quotes without undergoing a hard credit inquiry.