Parent PLUS Loan Repayment Guide
These days the cost of education is phenomenal. In fact, many people are priced entirely out of the ability to get a college or university education. In response to this, a vast array of student loan products have become available in recent years.
Among them are Parent PLUS loans that enable parents to finance the entire cost of their child's college or university attendance minus any other financial assistance that may be received.
While this can seem like a very good idea, there are many aspects of this type of loan that can come as a real shock to parents.
In this article, we will discuss some of the specifics of the Parent PLUS loan, provide sound advice about alternatives and share some good strategies for smart Parent PLUS loan repayment.
Strategies for Repaying Parent PLUS Loans
Here are three strategies you can use to lessen the burden of Parent PLUS loan repayment.
1. Parent Plus Loan Consolidation
As noted earlier, you may be eligible for a 20 year Income Contingent Plan of repayment if you consolidate your Parent PLUS loan. There is no income requirement for consolidation, and having a debt- to-income ratio that is high may actually be a benefit.
Remember that you don't need to have multiple loans in order to consolidate. You can simply consolidate your single loan to get some relief on your monthly payments.
2. Parent Plus Loan Forgiveness
Check to see if you might be eligible for Public Loan Forgiveness. If you are in the military, employed by a nonprofit agency or have a civilian government job, you may be able to get complete, tax-free loan forgiveness after you have made 120 payments on time.
Understand that this option is not available retroactively.
If you are retired from a public service job, you will not be able to qualify for this option.
3. Refinance Parent Plus loans
Private financing may be a viable option for you especially if you have good credit. Some banks offer very attractive interest rates to refinance student loans.
At the time of writing this article the interest rate for the Parent PLUS loan is 7.21%, but some banks (e.g. Citizens Bank) offer refinancing of student loans at a fixed rate of 4.74%. Variable rate refinancing starts at 2.31%.
Of course, if you go this route you must keep in mind that private financing does not offer you any of the protections of federal financing like MyFedloans, such as public service loan forgiveness and deferment.
Frequently Asked Questions about Parent PLUS Loans
If you have already taken the plunge and accepted the Parent PLUS loan, you may have a lot of questions about what happens next. In this section, we will address common FAQs.
1. When do I have to start paying?
You can begin paying off the PLUS loan as soon as all of the funds have been disbursed. Typically this will be during your child’s second semester at college or university.
If you are unable to begin at that time, you can defer your payments if your child changes to half-time enrollment or less, or when he or she graduates.
Typically these payments will begin six months after the change in enrollment status. Remember that defering payments does not mean defering interest. Interest will continue to accrue for the entire life of the loan.
2. What options are available for repayment?
There are four different repayment options available. They are:
- The Standard Repayment Plan consists of equal installments paid over a 10 year period.
- The Graduated Repayment Plan is also a 10 year plan with rising payment every two years.
- The Extended Repayment Plan consists of equal installments paid over a 25 year period of time.
- The Extended Graduated Repayment Plan involves rising payments every two years for a 25 year term of payment.
Throughout the life of your loan, you are allowed to change plans as you need to. This can be done by phone or online and there is no fee.
3. Is it possible to consolidate a Parent PLUS loan?
You can consolidate your PLUS loan using the Direct Consolidation Loan option. Doing so will allow you to extend the repayment term of your loan to a maximum of 30 years, thereby reducing your monthly payments.
Your interest rate will be determined by the average interest rate of the loans consolidated plus one-eighth of a percent.
This can mean a lowered interest rate if you are consolidating several loans, but it can be bad if you are consolidating only a single Parent PLUS loan because it will mean an automatic increase in your interest rate.
4. Can my child make payments on a Parent PLUS loan?
This is all right, but be aware that you cannot officially transfer this loan to your child. Once you sign on the dotted line, you are responsible for repaying this loan for the life of the loan.
This also means that a Parent PLUS loan cannot be consolidated along with your child's other student loans.
5. How can I save money repaying a Parent PLUS loan?
Just as with any loan, you can save money by prepaying it to prevent interest accruing. There is no fee for prepayment.
Additionally, you should be sure to take any and all tax deductions coming to you with this loan (typically $2500 a year).
Furthermore, you can save .25% by making your payments by automatic debit.
If You Haven't Leapt, Don't!
When your child has applied for college or university and is accepted, you may feel overwhelmed by the hefty price tag, and your judgment may be somewhat compromised.
If this is the case, when you receive your child's financial aid award letter, you may feel a sense of relief upon seeing the option for the Parent PLUS loan. With your good credit, you can qualify and provide your child with everything he or she needs to get through college or university stress free.
Step back and take a few breaths. Before signing on the dotted line, be sure to do your homework on this type of loan. Discuss it with your financial advisor if you have one.
One thing you should be very aware of with a PLUS loan is the fact that you will not be eligible for standard student loan income-based repayment options that would be available to your child as the borrower.
- With the standard Pay-As-You-Earn plan, your child would be able to reduce monthly payments to 10% of his or her discretionary income upon graduation and attainment of employment.
- With Income-Based Repayment, student loan borrowers can enjoy set monthly payments of 15% or 10% of their discretionary income.
- With the Income Contingent Repayment plan, borrowers are able to pay the lesser amount of either the fixed payment of a 12 year payment plan or 20% of their discretionary income.
These attractive options are available to students who secure standard student loans. If you take out a PLUS loan for your child, you will have none of these options; although, you might be able to access the Income Contingent Repayment plan if you consolidate a PLUS loan using a Direct Consolidation Loan.
For this reason, you would be better off to have your child apply for federal loans him or herself and then you make the payments.
Another thing you should keep in mind when deciding whether or not to take out a PLUS loan is that interest rates and loan fees are far lower for students than they would be for you.
Undergraduates pay a loan fee of 1.072% and an interest rate that is fixed at 4.66%. If you were to take out a PLUS loan for your child, your loan fee would be 4.292%, and your interest rate would be 7.21%.
As if all this were not enough to turn you away from a PLUS loan, remember that it is possible to have your Social Security or wages garnished for failure to pay federal loans of any kind. While this may seem a distant threat to your young son or daughter, it could be a very clear and present danger for you.
Alternatives to Parent PLUS Loans
If your child will simply not be able to go to the college or university of his or her choice without your taking out a PLUS loan, you should very seriously consider educational alternatives.
Rather than flushing your retirement down the drain to pay as much as $70,000 worth of tuition fees, consider making good use of your local community college for your child's first two years of higher education.
This is education you have already paid for in part with your taxes, and you and your child should benefit from it. This is especially true if you have several children you need to send a college or university.
Another alternative is to simply help your child with loan payments or make the payments entirely. As mentioned above, it is far wiser for you to make the payments on your child’s student loan (in his or her name) than for you to borrow the money on your child’s behalf.
This arrangement will give you and your child far more flexibility in terms of options for repayment.
Remember, if you make the payments on your child’s loan on a regular and timely basis, it will help build your child's credit rating!
If you take out a massive loan in your own name that threatens your retirement and subsequently have trouble making your payments, it could ruin your credit rating.
Whether you have or have not already taken out a Parent PLUS loan, we hope that the information we have shared will be helpful to you. Keep in mind that whatever decisions you face, you are wise to consider your entire financial situation.
It's very tempting to want to provide for your child; however, in this day and age providing a full college or university education may simply be impractical. Look at all of your options and weigh the importance of the give-and-take involved.
For example if you are retired or are about to retire, you should definitely not take out a Parent PLUS loan. If you have already done so, you would be wise to look into private financing options that will remove the government's ability to garnish your Social Security.
Student loan repayment is a serious matter, and it is even more so for parents who take on the responsibility of a Parent PLUS loan.