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Federal Parent PLUS Loans are available to parents of dependent undergraduate students. While parent borrowing PLUS has declined by 20% over the past 10 years, according to the College Board, it has increased significantly since 1990, reflecting the surge in college prices during that time.
Parents who find themselves overwhelmed by PLUS loans — or who just want to save money on repayment — have several options. One strategy for borrowing parents is to refinance student loans, which can result in lower interest rates for creditworthy applicants. Some lenders even allow parents to transfer their PLUS loans to their children.
What is a Parent PLUS loan?
Parent PLUS Loans are a type of Federal Direct Loan, which is also the umbrella under which Federal Subsidized and Unsubsidized Loans and Graduate PLUS Loans fall. But parent loans PLUS have major differences:
- PLUS loans require a credit check, unlike other types of federal loans. To obtain a loan, you must demonstrate that you meet specific criteria. For example, you cannot have more than $2,085 in debt 90 days past due or negative marks such as default, bankruptcy, repossession, or seizure on your credit report within previous five years.
- You can still get a parent PLUS loan if you have a so-called “adverse credit history”. You must obtain a co-signer (called an endorser) or successfully document the extenuating circumstances that led to your negative credit history. In both cases, you will also participate in credit counseling.
- Parents can borrow up to the amount of their child’s tuition, after subtracting any other financial aid they have received. This can cause some parents to take on more debt than they need.
- Parent PLUS borrowers are not eligible for all federal repayment plans. In order to qualify for income contingent repayment, they must consolidate their PLUS loans federally and enroll in income contingent repayment (ICR).
- Parent PLUS loans have higher interest rates and fees than other federal loans. For 2021-22, the fixed interest rate is 6.28%, compared to 3.73% for subsidized and unsubsidized loans for undergraduates. The parent PLUS loan fee is 4.228% of the total loan balance, compared to 1.057% for subsidized and unsubsidized loans.
Should you refinance a Parent PLUS loan?
Since parent PLUS loans are generally more expensive than other federal loans and have fewer payment reduction options, refinancing offers the opportunity to save money with less inconvenience. This does not mean, however, that refinancing parent loans PLUS is without risk, so it is important to compare the advantages and disadvantages according to your personal situation.
As a general rule, it’s a good idea to consider PLUS parent refinance in the following circumstances:
- As a parent borrower, you have a good or excellent credit rating and may qualify for the most competitive interest rates. Or, even if you don’t qualify for the lowest fare available, you’ll earn multiple points off the fare you’re currently paying.
- You are not working for an employer who would qualify you for Public Service Loan Forgiveness (PSLF). Parent PLUS loans are eligible for this program when consolidated federally and repaid under the ICR. If you refinance federal loans, they will become private loans and you will lose access to the PSLF.
- Your income is strong and consistent, and you don’t anticipate having to defer or reduce your payments in the future.
Avoid parent PLUS refinance if:
- Your credit score, income, or debt-to-equity ratio would not qualify you for a significantly lower interest rate than what you are currently paying.
- You work at the PSLF or you would benefit from subscribing to the reimbursement plan based on income.
- You may need to defer deferral or forbearance payments for a period of time. Federal loans offer much more flexibility than refinanced private loans.
Refinance on behalf of parent or student
If the student you took out PLUS loans for has left school and now has good credit and a solid income, they may be able to refinance your parent’s PLUS loans in their own name and assume the responsibility for payment. With this strategy, a parent essentially transfers a parent PLUS loan to a student.
Not all lenders offer this option, so be sure to explicitly ask all lenders you are considering. If the student’s financial profile does not make them eligible for refinancing on their own, you can co-sign their refinance loan. Keep in mind that even though you will no longer be the primary borrower, you will still be required to repay if your child cannot afford to pay.
How to Refinance Parent PLUS Loans
Follow these steps to complete the parent PLUS loan refinance process:
1. Compare lenders
The best way to get the lowest rate possible is to compare several refinance offers. Many lenders offer prequalification on their websites. Use it to get an estimate of the interest rate you could receive without undergoing a credit check.
Also take a look at other features, such as eligibility requirements, available forbearance, potential interest rate reductions, and repayment terms.
2. Estimate how much you could save
Once you’ve received a few tentative offers from lenders, verify that refinancing is worth it for you.
Calculate how much you would pay on your current repayment plan with your current interest rate over the next five, 10, or 15 years (or whatever refinance term you choose). Compare that with what you would pay at the new interest rate and identify your potential savings, if any. A refinance calculator can do the math for you.
3. Gather documentation
Once you’ve chosen a lender, rate, and term, get ready to submit your application. You will probably need the following documents: a driver’s license or passport; proof of U.S. citizenship, such as a Social Security number; proof of employment and income, such as payslips; and 30-day repayment statements from your current lenders or student loan servicers for each loan you plan to refinance.
A repayment statement tells the new refinance lender how much they will pay your servicer so they can take care of your debt. To get your payment statements, log into your repairer’s online portal or call their customer service number.
4. Submit an application
Once all your documents are ready, complete an application. Most refinance lenders allow you to do this on their website, although some traditional banks and credit unions may require you to visit a local branch. At this point, the lender will carry out a firm credit check, which will appear on your credit report and result in a formal interest rate offer. Make sure you are comfortable with the offer and read the loan agreement to understand all fees and requirements.
If your application is accepted, the new lender will have you sign a loan agreement before repaying your previous loans. Be sure to continue to repay your previous loans until you have received confirmation to start making payments to the refinance lender.
Alternatives to Refinancing a Parent PLUS Loan
You may find that you don’t qualify for a parent PLUS loan refinance or you’d rather not lose valuable federal loan protections. But if you want to pay less per month, try these alternatives:
- Federal Loan Consolidation: By consolidating a parent PLUS loan into a direct consolidation loan, the term of your loan will vary from 10 to 30 years, depending on the loan balance. This will likely mean a lower payout. But you’ll pay more interest over time with a longer-term loan, so compare it with other repayment options before moving forward. If you choose ICR, you will need to consolidate parent PLUS loans first.
- Reimbursement based on income: Under the ICR, you’ll either pay 20% of your discretionary income depending on your family size and income, or the amount you would have to if you were to choose a 12-year repayment plan with fixed payments , whichever is lower. You’ll need to recertify your earnings each year, which means your payments could go down or up. You will receive a rebate on the remaining loan balance after 25 years.
- Extended repayment: You must have at least $30,000 in PLUS loans to be able to repay them under the extended plan. Your repayment period will be 25 years, instead of 10 years on the standard plan, and you can choose fixed or progressive payments (which increase gradually). If you’re likely to take a long time to repay your loans, it might make more sense to choose the ICR, as you’ll potentially get lower payments and discount at the end of the repayment period.
- Progressive repayment: This 10-year plan starts with lower payments that increase every two years. This is a good option if you expect your income to increase, but it might be less useful for parents who have already reached their maximum income potential or who may retire during the repayment period.
- Get help from your child: It is always possible to create an informal arrangement with your child in which they help you repay the PLUS loans. It’s best if you agree on an amount they can afford and put the plan in writing. This way you know when to expect payment from them each month.