The process of Parent PLUS loan repayment works a bit differently than most other federal student loans.
Unlike nearly all other kinds of student debt, the parent borrows the money rather than the student. This dynamic causes confusion when researching topics, such as federal program eligibility, repayment plan selection, student loan forgiveness options, and when making strategic decisions.
The good news is that borrowers can avoid the confusion and repay their Parent PLUS loans without too much stress. By taking the proper steps, borrowers of Parent PLUS loans can enroll in an income-driven repayment plan and even qualify for student loan forgiveness. In some circumstances, parents can also transfer the Parent PLUS loan debt to their child.
With the many ways to repay Parent PLUS loans, Parent PLUS loan repayment should never endanger a retirement plan or jeopardize a parent and child’s relationship.
Parent PLUS Loan Repayment Plans
The federal government is stingy when it comes to Parent PLUS loan repayment. Parent PLUS loans have the highest interest rates and loan origination fees. They also have the fewest repayment plan options.
The repayment plan options available to all Parent PLUS borrowers are the standard repayment plan, the graduated repayment plan, and the extended repayment plan. For some borrowers, these default options are acceptable. For others, however, these limited options are a significant problem. This is especially true for Parent PLUS borrowers who cannot afford any monthly payments or who need a path to student loan forgiveness.
The good news for borrowers struggling with Parent PLUS loan payments is that it is possible to enroll in an income-driven repayment plan.
Enrolling in an Income-Driven Repayment Plan
Although Parent PLUS loans are not initially eligible for an income-driven repayment plan, federal direct consolidation can fix that issue.
When a borrower consolidates a Parent PLUS loan through the Department of Education, it becomes a Federal Direct Loan. All borrowers are eligible for federal direct consolidation regardless of loan status, credit score, or income. The Department of Education estimates that completing the application for consolidation takes less than 30 minutes.
A Word of Caution:There is risk to taking the federal consolidation approach.
One of the most common mistakes is to consolidate Parent PLUS loans with other federal student loans. If a borrower combines a Parent PLUS loan with other federal direct loans, the resulting consolidated loan has limited repayment and forgiveness options.
Due to the possibility of making an ill-advised consolidation, borrowers should carefully consider the implications of consolidating before starting the process.
Once federal consolidation is complete, borrowers can enroll in the Income-Contingent Repayment (ICR) plan.
$0 Payments for Parent PLUS Loans
Enrollment in the ICR plan means borrowers can make payments based upon their income rather than what they owe. Borrowers who are unemployed or have low salaries can have payments as low as $0 per month. For example, Parent PLUS loan borrowers living on Social Security are likely to have $0 per month ICR payments, assuming they do not have additional income sources.
Parent PLUS loan borrowers on the ICR plan are expected to pay 20% of their monthly discretionary income towards their debt. Discretionary income is the money a borrower earns beyond the federal poverty level. Borrowers can find full details on discretionary income calculations here, but the quickest way to estimate ICR payments is to use the federal student loan simulator.
Parent PLUS Loan Repayment Options and IBR, PAYE, and REPAYE
While the ICR plan charges borrowers 20% of their monthly discretionary income, other federal repayment plans cost less.
The Income-Based Repayment (IBR) Plan, Pay As You Earn (PAYE) Plan, and Revised Pay As You Earn (REPAYE) Plan all charge 10% to 15% of a borrower’s discretionary income. Unfortunately, Parent PLUS loans cannot be eligible for these plans, even with federal direct consolidation.
Getting Lower Interest Rates on Parent PLUS Loan Repayment
Parent PLUS loan borrowers are not eligible to get lower interest rates on their Parent PLUS loans under any circumstance. The only exception would be the .25% interest rate reduction offered to borrowers who make automatic payments.
Borrowers looking for lower interest rates will have to refinance their loans with a private lender. Refinancing causes the loan to lose federal perks such as the ICR plan and student loan forgiveness, but it also helps the borrower qualify for a lower interest rate.
About 20 different national lenders offer student loan refinancing services, but not all of them will refinance Parent PLUS loans. Lenders who will refinance Parent PLUS loans include CommonBond, ELFI, and Laurel Road. These three lenders all offer interest rates starting below 3%.
Transferring Parent PLUS Loan Repayment to Children
The federal government does not offer a path for moving Parent PLUS loans to the children who benefitted from the loan.
While children are permitted to make payments for the debt, the federal government does not care if a child made promises to make payments on the loan. The Parent PLUS loan is a contract between the government and the parent. The government holds the parent accountable for the payments.
Consequently, the parent who took out the Parent PLUS loan will always remain the one legally responsible for it. The debt will appear on the parent’s credit report and, if someone isn’t making payments on the loan, the parent will be in default and possibly sued.
However, even though the government will not let borrowers transfer the debt to their children, there is a work-around that can help in some circumstances.
Refinancing Parent PLUS Loans in Child’s Name
Some student loan refinance companies will be willing to refinance a Parent PLUS loan in the name of the child who borrowed the loan.
The process is similar to a standard student loan refinance:
- The child who benefitted from the Parent PLUS loan applies to refinance the loan.
- If the refinance lender approves, the lender will pay off the Parent PLUS loan in full.
- The child is then responsible for repaying a new private loan with new terms.
- The parent has no further legal responsibilities for the debt.
Unfortunately, the list of companies willing to participate in this process is relatively small. One lender that does advertise Parent PLUS refinancing in the name of the child is SoFi.
This significant advantage to this move is that it eliminates both the Parent PLUS loan and the parent’s legal obligations. Also, depending on the child’s credit score and income level, they may get a lower interest rate.
The disadvantage to this move is that making the loan private eliminates the federal repayment plan and loan forgiveness options.
Student Loan Forgiveness for Parent PLUS Loans
There are several different circumstances in which the government may forgive a Parent PLUS loan.
Public Service Loan Forgiveness (PSLF) – Parents employed by a public service employer, such as the government or a 501(c)(3) may be eligible for PSLF. Going this route will require federal direct consolidation before the 10-year forgiveness clock starts. Borrowers need to pay close attention to the details in the process of loan consolidation, ICR enrollment, and acquiring PSLF certification. Those thinking about pursuing this path should understand the steps and the requirements for PSLF for PLUS Loans. Missing a requirement may mean starting over from scratch.
Income-Driven Repayment Forgiveness – Parent PLUS loan borrowers who enroll in the ICR plan can have their loans forgiven after 25 years, regardless of their employer. Forgiveness after 20 to 25 years is a standard term on all of the income-driven repayment plans. The downside is that after 25 years, borrowers with forgiven loans may have to pay a tax bill on the debt forgiven. The IRS treats this forgiven debt as income in the year it is forgiven. Borrowers pursuing forgiveness via this route should prepare for the massive future tax bill.
Death and Disability Discharge – If the parent who borrowed the Parent PLUS loan becomes permanently disabled or dies, the government will forgive the remaining debt. Similarly, if the student for whom the loan was borrowed dies, the Parent PLUS loan can be forgiven. Loans that fall into these categories have a special application procedure for the discharge.
Using 401(k) or Other Retirement Funds
Because the repayment options for Parent PLUS loans are not ideal, many parents consider using 401(k) funds or other retirement accounts to pay down the debt.
We do not recommend using retirement funds to pay down student debt.
The analysis is straightforward. Once a borrower moves their money from their retirement account and applies it to the debt, there is no turning back. The borrower loses that money forever.
Dealing with Parent PLUS loans may be a hassle, but taking money out of a retirement account turns a student loan issue into a retirement issue. While there are options to deal with a Parent PLUS loan without any income, retirement options without any income are far more limited.
Parent PLUS loan repayment can get very complicated, very quickly. For this reason, it is a good idea to make repayment a team effort.
Both the parent who borrowed the loan and the student who benefitted from the loan should research and understand the repayment options and strategies. By working together, they can avoid mistakes and find an approach that works well for everyone involved.