There is a ton of fine print associated with federal student loans. Certain loans qualify for certain repayment plans. Some people are eligible for some programs while others are not.
Consolidating loans can turn loans that are not eligible for certain programs into loans that are eligible. Years of legislative changes to student debt, combined with Department of Education fine print, can make things confusing.
Things can get especially difficult with Parent PLUS loans because of the limited options available for repayment and the steps required to enroll.
It is in this tangled-up web of rules and regulations that some borrowers make an incredibly expensive mistake. They consolidate their Parent PLUS loans with other federal loans.
Parent PLUS Loan Consolidation
Why is it a mistake to combine Parent PLUS loans with other federal loans?
There are certain limitations that apply to Parent PLUS loans. For example, Parent PLUS loans are not eligible for the best repayment plans. These plans include income-driven plans such as IBR (Income-Based Repayment), PAYE (Pay As You Earn), and SAVE (Saving on A Valuable Education). The only income-driven plan that Parent PLUS loans are eligible for is the Income-Contingent Repayment Plan (ICR).
To the average borrower, these plans all sound pretty much identical. In reality, there are huge differences between these plans. All of these plans require borrowers to pay a certain portion of their discretionary income towards their student loans each month. The idea is that you pay what you can afford, regardless of how much you owe.
However, these plans require different percentages of your discretionary income. PAYE and SAVE are great because they only require 10%. IBR is a little bit more expensive, requiring borrowers to pay 15%. ICR is the most expensive, requiring 20%. Outside of the percentages, there are other differences between these repayment plans, but the important part is this: for many borrowers, signing up for ICR will result in double the monthly payment.
Why Does ICR Even Exist?
Once upon a time, ICR was the very best plan available.
For borrowers who didn’t have jobs, or who could afford their monthly payments, ICR was awesome. Payments were based upon income, not debt levels.
As time passed, Congress and the Department of Education decided that 20% was too high. A new plan came along requiring only 15% of a borrower’s monthly discretionary income, and IBR was born. As more time passed, new plans came along requiring only 10%.
Even though ICR was once the best, it has become an outdated dinosaur.
Unfortunately, for borrowers with Parent PLUS loans, it is the best plan that their loans are eligible for. Borrowers with a Parent PLUS loan cannot sign up for IBR, PAYE, or SAVE with that loan.
Sherpa Tip: If you have parent PLUS loans, the typical solution is to do a split consolidation. Parent PLUS loans go into one consolidated loan, and all other federal loans go into another consolidated loan.
One other option that is temporarily available for some borrowers is the double-consolidation loophole. This loophole will eventually get closed, but for now some borrowers may be able to get around the strict Parent PLUS rules.
The Big Parent PLUS Error To Avoid
The borrowers with their own federal loans and Parent PLUS loans have mixed eligibility problems.
Some loans can sign up for preferred repayment plans while others cannot. In this situation, the best option is usually to pay off the Parent PLUS loan first. Once that loan is eliminated, the other loans can be enrolled in the more generous repayment plans.
The worst thing that can be done is consolidating a Parent PLUS loan with other federal student loans into a federal direct consolidation loan. The government will then apply the restrictions that applied to the Parent PLUS loan to the new larger loan.
As an example, suppose a borrower has $25,000 in federal loans from when they went to school and $5,000 in Parent PLUS loans to pay for their child’s education. The borrower can combine the loans into a $30,000 direct consolidation loan. The problem is the government will treat the new loan with all the limitations of a Parent PLUS loan. The $25,000 that would have been eligible for IBR or REPAYE is now only eligible for ICR. It can be an expensive mistake.
Avoiding the Parent PLUS Consolidation Mistake
Combining Parent PLUS loans with other federal loans is almost always a mistake. There are many ways borrowers can get tripped up when consolidating.
First, the many different federal repayment plan options can make things confusing.
Second, even though combining Parent PLUS loans with other federal student loans is a huge mistake, borrowers do have the right to combine the loans in a consolidation.
Finally, many customer service representatives do not understand the magnitude of the mistake. If they don’t understand why it is a bad idea, they cannot warn borrowers before it is too late.
The Severity of the Situation
Once the loan is consolidated, there is no undo button. There is no fix. A consolidated loan cannot be “unconsolidated.”
For many borrowers, this can mean decades of higher student loan payments due to one single mistake.
Sherpa Thought: I think there is a great argument for this rule to change. However, making that change a reality will require action from affected borrowers.
Combining Parent PLUS loans with other student loans in a direct consolidation loan can be a lasting error. Unfortunately for many borrowers, it is an easy mistake to make, and there is no good way of fixing it.
(Editor’s Note: There are also Graduate PLUS loans… these loans sound very similar to Parent PLUS loans, but combining them with other federal loans is not the same huge mistake. The Graduate PLUS loans are eligible for the preferred repayment plans. Dealing with these loans is an entirely different circumstance.)