Most news about student loans focuses on struggling college graduates who can’t repay their loans.
But what about the parents? We hardly ever hear about parents who are stuck repaying Parent PLUS Loans for their children who obtained an undergraduate degree.
This group of parents isn’t so small, either. In fact, Parent PLUS loan debt currently stands at about $62 billion.
Even worse, Parent PLUS loans have the highest interest rates among all federal student loans. For the 2014–15 school year, the rate is 7.21%. Plus, that’s expected to rise again on July 1, 2015, when rates will be set for the upcoming school year.
On the plus side, I’m happy to report that many Parent PLUS loan repayment options available to students with loans are also available to parents. But what are the best options? Let’s take a look…
1) Income-Contingent Parent PLUS Loan Repayment Plan
Pros: Lowers monthly payments and offers Parent PLUS loan forgiveness after 25 years.
Cons: Likely increases total interest charges. Requires paying a higher percentage of income than other repayment plans.
Currently, the Income-Based Repayment and Pay As You Earn plans aren’t available for Parent PLUS loans. As a result, parents generally have to pay a larger chunk of their discretionary income. But these payments may still be less than those of other options.
Parent PLUS loans are eligible for Income-Contingent Repayment if they have been included in a Federal Direct Consolidation loan. Income Contingent Repayment caps payments at 20% of the borrower’s discretionary income. Keep in mind that discretionary income is usually less than gross income earned.
One advantage with Income-Contingent Repayment is that you’ll be eligible for Parent PLUS loan forgiveness after you make payments for 25 years. However, the same limitations apply as for student loan forgiveness, so you must see how much forgiveness is worth compared to added interest costs.
To qualify for income-contingent repayment, your Parent PLUS loan will need to be consolidated first by the Department of Education into a Direct Consolidation loan. This is the standard federal student loan consolidation option. In order to apply for a Direct Consolidation loan you should contact your student loan servicer.
2) Parent PLUS Loan Consolidation and Refinancing
Pros: Decreases high interest rates on Parent PLUS Loans.
Cons: Requires borrowers to qualify based on credit and income, as well as negates some flexibility afforded by federal student loans.
Parent PLUS Loan consolidation has the potential to work especially well for some parents. In general, parents of college students have more established credit histories than graduates in their 20s. If you’re a parent who has maintained a high credit score, then your situation bodes well for your approval for student loan consolidation.
Generally, banks that refinance Parent PLUS loans like to see steady income and employment history as well, which will increase your odds of being approved.
However, keep in mind that private student loans don’t have all of the same repayment options that federal student loans do. While you can change federal student loan repayment plans at any time, this isn’t the case with private student loans.
Consolidating Parent PLUS loans includes another option: refinancing your Parent PLUS loans into your child’s name. This is currently offered by Darien Rowayton Bank, SoFi, and CommonBond.
3) Public Service Loan Forgiveness (PSLF)
Pros: Eligible for Parent PLUS loan forgiveness after 10 years.
Cons: Limited to certain career fields.
Public Service Loan Forgiveness is a federal program for certain public service employees, such as those in government and nonprofits fields. This program allows all federal student loan debt to be forgiven after 120 payments (typically 10 years).
Many graduates on track to take advantage of public service loan forgiveness do so with income-based repayment plans. Just keep in mind that as mentioned above, Income-Based Repayment isn’t available for Parent PLUS loans. Instead, you’ll likely need to consolidate your loan with the Federal Government and use Income-Contingent Repayment.
Before you shoot for public service loan forgiveness, make sure you qualify. All of the rules that apply to other federal student loans typically apply to Parent PLUS loans as well.
With any loan for which you plan to take advantage of loan forgiveness, make sure that your strategy is a smart one. It’s possible that you might not have much or any debt left over to forgive after the repayment period. This can do more harm than good as you will pay a bunch of extra interest yet receive nothing in return.
4) Standard Parent PLUS Loan Repayment
Pros: Keeps the total cost down via repayment over 10 years.
Cons: Could be less affordable, given comparably high monthly payments.
If you’re paying off a Parent PLUS loan, then you’ll automatically be enrolled in the Standard Repayment Plan. There’s nothing wrong with this option, as long as you can afford to make the payments. Stay on track, and you’ll have the loans paid off in 10 years.
The only problems with standard Parent PLUS loan repayment surface when you can’t afford to make payments. If such cases, you’ll likely want to pursue another repayment option instead of risking default.
In addition to the options above, also note: graduated repayment and extended repayment options are also available. However, they often aren’t preferable to the other options listed here.
So, which option should you choose? The choice really depends on your situation. The best option is typically the one by which you can pay off student loans most quickly and at the lowest cost.
No matter which repayment method, all student loans are eligible for astudent loan interest deduction of up to $2,500. However, since this deduction is subject to several rules (including income caps), check out our posts to see whether you qualify.
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