Many well intentioned parents take out large amounts of Parent PLUS loans through the federal government to help pay for their child’s education. When their child finishes school, if they choose not to help or are otherwise unable to help mom or dad pay off the loans, it can be a major problem.
Many sites, including this one, suggest that college students select federal government loans over private loans. This is because the federal government loans have the best selection of repayment plans and paths to student loan forgiveness.
Parent PLUS loans are technically federal loans, but as many people find out too late, they don’t come with nearly the same perks as the other federal government loans. Fortunately, if you get creative with your debt, it is possible to get payments to a reasonable level for any income.
Lowering Parent PLUS Payments
The biggest problem with Parent PLUS loans is that you cannot sign up for an Income Driven Repayment Plan. The most popular federal repayment plans are Income Based Repayment (IBR) and Pay As You Earn (PAYE). Unfortunately, there is no way to get a Parent PLUS loan on either of these plans.
However, there is still hope for parents who find themselves with payments much larger than they can afford. There is a relatively simple two step process for getting more realistic payments based upon your income.
Step One: Federal Direct Consolidation
If you google “Student Loan Consolidation” you will find a ton of different options. There are many companies that private student loan consolidation. These lenders are usually called refinance companies. However, be on the lookout for companies that offer free student loan consolidation and forgiveness. Some of these companies charge a fee for free government services and should always be avoided. Finally, there is federal direct consolidation.
In order to apply for federal direct consolidation, go to https://studentloans.gov/
The purpose behind going this route is somewhat silly. You may only have one Parent PLUS loan, or you may have many. By consolidating your loans (even if it is just one), it becomes a federal direct consolidation loan instead of a Parent PLUS loan.
Important Note on Federal Direct Consolidation: If you do consolidate, be sure to only put Parent PLUS loans into the new consolidated loan. If you have other federal student loans and Parent PLUS loans, you absolutely want to keep them separate. Combining other federal student loans with a Parent PLUS loan can result in your other student loans losing their eligibility for more favorable repayment plans.
Step Two: Sign up for Income-Contingent Repayment
Income-Contingent Repayment is the ugly relative of IBR and PAYE. The terms are not as good, but for many it is by far the best available alternative.
Your Income-Contingent Payment is 20% of your discretionary income (or your households if you and your spouse file taxes jointly). That means that if you are making little or no money, your monthly payment will be $0 per month! While a zero dollar payment doesn’t do anything to help your student loan balance, it does count towards the 25 years of payments for student loan forgiveness. (Note: there could be major tax consequences after 25 years, so be on the lookout for that). This approach also gets you eligible for public service forgiveness if you work in government or for a non-profit.
It is more than a little bit silly that you have to jump through these hoops just to get signed up for the repayment plan you need. At most loan servicers, the average customer service rep may not even think to suggest going this route.
This is a somewhat tricky strategy, with some hazards along the way (be careful to only consolidate the Parent PLUS loans!), but if you it right, lower payments are in your future.