Parent PLUS loan repayment appears to be very complicated.
Unlike nearly all other forms of student debt, the money is borrowed by the parent and not the student. This makes federal program eligibility confusing. These issues are present in repayment plan selection, student loan forgiveness options, and when making strategy decisions.
The good news is that most Parent PLUS loan issues can be resolved without too much stress. By taking the proper steps, Parent PLUS loans can be enrolled 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.
There are many ways to repay Parent PLUS loans. As a result, Parent PLUS loans should never endanger a retirement plan or jeopardize the relationship between a parent and child.
Parent PLUS Loan Repayment Plans
On the surface, the federal government is very stingy with Parent PLUS loan repayment.
Parent PLUS loans have the highest interest rates and loan origination fees. They also have the fewest repayment plan options.
All Parent PLUS loans are eligible to be enrolled in the standard repayment plan, the graduated repayment plan, and the extended repayment plan. For some borrowers, the default options are acceptable. For others, limited options are a major problem. This is especially true for Parent PLUS borrowers who cannot afford any monthly payment 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 get enrolled in an income-driven repayment plan…
Enrolling in an Income-Driven Repayment Plan
Parent PLUS loans may not initially be eligible for an income-driven repayment plan, but federal direct consolidation can fix that issue.
When a Parent PLUS loan is consolidated through the Department of Education it becomes a Federal Direct Loan. Federal Direct Loans are eligible for the income-contingent repayment plan.
The downside to federal consolidation is the possibility of borrower mistakes. One of the most common mistakes is to consolidate Parent PLUS loans with other federal student loans. By combining 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 consolidation before starting the process.
The Department of Education estimates that completing the application for consolidation takes less than 30 minutes. All borrowers are eligible for federal direct consolidation regardless of loan status, credit score, or income.
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 $0 per month payments.
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. Full details on discretionary income calculations can be found here, but the quickest way to estimate ICR payments is to use the federal student loan repayment estimator.
Parent PLUS loan borrowers who are living on Social Security are likely to have $0 per month ICR payments, assuming they do not have other sources of income.
The downside to Parent PLUS loans is that there is no path to enrollment in the preferred federal repayment plans.
Parent PLUS Loans, IBR, PAYE and REPAYE
While ICR charges borrowers 20% of their monthly discretionary income, other federal repayment plans cost less.
Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE) all charge either 15% or 10% of a borrower’s discretionary income.
Unfortunately, consolidating a Parent PLUS will not help the loan become eligible for IBR, PAYE, or REPAYE.
Getting Lower Interest Rates on Parent PLUS Loans
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 that is 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.
There are about 20 different national lenders offering 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 Loans to Children
The federal government does not offer a path for moving Parent PLUS loans to the children who benefitted from the loan.
Children are permitted to make payments for the debt, but a Parent PLUS loan will always remain the legal responsibility of the parent who took out the loan. This means that the debt will appear on the parent’s credit report, and the parent will be in default and possibly sued if payments are not made on the debt.
The federal government will not care if a child made a promise to the parent to pay off the loan. The Parent PLUS loan is a contract between the government and the parent, and as such, the government holds the parent accountable for payments.
However, even though the government will not let borrowers transfer the debt to their children, there is a work-around that will 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 child is approved, the refinance lender will pay off the Parent PLUS loan.
- The child is then responsible for repaying a new private loan with new terms.
- The Parent PLUS loan is paid in full and the parent has no further legal responsibilities for the debt.
Unfortunately, the list of companies willing to do this process is rather small. One lender that does advertise Parent PLUS refinancing in the name of the child is SoFi.
The big advantage to this move is that the Parent PLUS loan, and parental debt, is eliminated. Depending on the credit score and income of the child, they may also be able to get a much lower interest rate. The downside is that the federal repayment plans and loan forgiveness are also eliminated as the new loan is a private loan.
Student Loan Forgiveness for Parent PLUS Loans
There are several different circumstances in which a Parent PLUS loan may be forgiven.
Public Service Loan Forgiveness (PSLF) – Parents who are 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. Between consolidation, ICR enrollment, and PSLF certification, the process can be complicated. Borrowers thinking about this path should understand the steps and the requirements for PSLF for PLUS Loans.
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 will have to pay a tax bill on the debt forgiven. This is because the IRS treats this forgiven debt as income 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 remaining debt is forgiven. 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.
Using retirement funds to pay down student debt is not recommended.
The analysis is straightforward. Once the money is moved from a retirement account and applied to the debt, there is no turning back. That money is gone 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, the prospects for retirement without any income are far more limited.
Parent PLUS loan repayment can get very complicated 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 the loan should research and understand the repayment options and strategy. By working together, they can avoid mistakes and find an approach that works well for everyone involved.