As of June 2019, there were approximately 3.5 million Parent PLUS student loan borrowers, with approximately $100 billion in outstanding loans.
While this is only a small portion of the 40 million plus student loan borrowers and $1.6 trillion in outstanding student loans, Parent PLUS loans do have different repayment options and requirements than other federal loans, specifically when looking at options for income-driven repayment and opportunities for loan forgiveness.
Since publishing Student Loan Solution I’ve been hearing more and more questions about options for Parent PLUS student loans. This isn’t particularly surprising, because Parent PLUS borrowers are in a unique situation. Many are nearing traditional retirement age, which contrasts with typical student loan borrowers who are younger and have decades ahead of them to repay their loans. They also need to save more for retirement since it is much closer than for someone in their 20s or 30s.
There is also the sometimes awkward dynamic where the parent expects their children to repay the Parent PLUS loans they took out. While this arrangement certainly happens often, even if the children are expected to repay the Parent PLUS loans there is a huge advantage to keeping the loans in the parent’s name and not transferring them to their children through refinancing with a private lender. Let’s start by addressing this.
Why Parent PLUS Student Loans Should Stay With the Parent
In some situations there is an agreement between a parent and their children that the parent will take out Parent PLUS loans, but the student will repay the loans. Even if this isn’t the initial agreement or expectation, the parent may later realize that they can’t or won’t repay the Parent PLUS loans and pressure the student to repay them and perhaps even attempt to put them in their children’s name through student loan refinancing.
Besides the benefit of potentially removing the awkwardness of the situation, refinancing a Parent PLUS loan and moving it under a student’s name is a mistake for one big reason: Parent PLUS loans are discharged when a parent passes away and the burden is not put on the estate. If you refinance under the child’s name, that loan will continue on even if the parent passes away.
This reason alone should be enough to keep Parent PLUS student loans in the parent’s name. If a parent consistently pushes for refinance their Parent PLUS loans in a child’s name, I would encourage that child to push back. It simply doesn’t make sense.
Assuming a parent is on board with keeping the Parent PLUS loans in their name, they still may consider refinancing with a private lender to get a better interest rate. But before they go through with the refinance they should fully understand some of the benefits of keeping Parent PLUS loans as federal loans.
Consolidation Opens Up Opportunities
Parent PLUS loans are federal student loans, but unlike other federal student loans they are not eligible for any of the four income-driven repayment plans. That means they also are not eligible for any loan forgiveness opportunities, either.
Despite these disadvantages, Parent PLUS loan holders do have an opportunity to access one of the four income-driven repayment plans, and in turn, open themselves up for opportunities for loan forgiveness. If the loan holder consolidates their Parent PLUS loans into a Direct Consolidation Loan, they will be eligible for the Income-Contingent Repayment (ICR) plan, which caps repayment at 20% of a borrower’s discretionary income (which factors in things like Adjusted Gross Income and the federal poverty level).
ICR is the least favorable of the four income-driven repayment plans, but for some borrowers it is much better than being stuck on the standard ten-year repayment plan, where they may be unable to afford payments and default on their loans, triggering wage garnishment and other actions by the government.
One word of warning before going through with consolidation: only consolidate Parent PLUS loans with other Parent PLUS loans, do not include any other student loans in the consolidation. Why? Because Direct Consolidation loans that repaid any Parent PLUS loans makes that new Direct Consolidation loan ineligible for the three other income-driven repayment plans, namely Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE), and Income-Based Repayment (IBR), which are all much more favorable than ICR.
Once you consolidate Parent PLUS loans into a Direct Consolidation loan, not only can you move onto ICR which gives you more affordable monthly payments, it also opens you up to loan forgiveness opportunities. Working down the path of loan forgiveness can be a much more hopeful scenario for parents who otherwise may feel like “I will be repaying these loans until I die.”
When you start making payments on ICR you start down the path of income-driven loan forgiveness, which you are eligible for after 25 years of on-time payments. That may seem like a long time, and it is, but at least you are heading down the path. One thing to keep in mind is that when the loan balance is discharged, under the current law you do owe taxes on the forgiven amount. Meaning, if you have $200k forgiven, you will have $200k of reported income that year.
ICR also opens you up to an opportunity for Public Service Loan Forgiveness, or PSLF. Despite the negative press PSLF received when the first batch of applications for forgiveness were made, it is the holy grail of loan forgiveness because of how favorable the terms are. 120 monthly qualifying payments is what is needed to achieve PSLF, and the loan balance that is forgiven is tax-free. You can read more about how PSLF works here.
The bottom line is this: Parent PLUS loan borrowers have the opportunity to cap their monthly loan payments at a reasonable amount, as well as open themselves up to opportunities for loan forgiveness. If you decide to consolidate your loans you can do so at StudentLoans.Gov.
Unsure whether you would benefit from ICR? You can plug your numbers into the calculators within our free student loan spreadsheet.
Get out of Default
Because there are likely many with Parent PLUS loans who are currently either behind on their loans or in default, it’s worth mentioning that before consolidating your loans and applying for ICR you need to make your loans current (in other words, in good standing). This can be done a couple of different ways, which I outline in this blog post.
Does Refinance Ever Make Sense?
So far I haven’t thoroughly addressed the option of refinancing Parent PLUS loans, and whether it ever makes sense. First I’ll reiterate that it makes sense to keep these loans with the parent and not refinance in the student/grad’s name. You need to look no further than the parent passing away shortly after refinancing in the child’s name to see why it makes sense to keep it with the parent. When the parent passes away the Parent PLUS loans pass with them; if they were refinanced in another name, they will continue on and need to be repaid.
Looking specifically at the refinance versus not refinance scenario, in most cases it makes sense to keep federal loans as federal loans. With Parent PLUS loans it’s cut and dry that if the owner of the loans passes away, the loans pass with them. With private loans there could be instances where the lender tries to collect against the estate, though this will vary and depends on the fine print of the private loans.
With all this being said, it’s undeniable that if a Parent PLUS loan holder has the means of repaying the loans and has the option to refinance for a couple percentage points cheaper they will save potentially thousands of dollars on interest. The reason why refinancing has become so popular is because it is such a simple value proposition: the bank offering the refinancing can add to their balance sheet and the borrower can save money on interest.
If you do look into refinancing Parent PLUS or other student loans, you can see offers from multiple lenders at once on Credible. If you use my link for Credible and end up going through with refinancing your student loans, you will get a $300 cash bonus if you refinance less than $100k and a $750 cash bonus if you refinance more than $100k.
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