– Parent Plus Loans –
Parent Plus Loans: You helped your student get through college by taking out a Federal Direct Parent PLUS Loan. These loans, which are your responsibility to repay, enter repayment 60 days after full disbursement or 6 months after your student graduates or drops below half-time enrollment.
Student loans aren’t limited to students. Increasingly, parents take on debt to help their children cover college costs. However, there are several options to Pay Off Parent Plus Loans 2022.
First, there are a lot of misconceptions surrounding what you can or can’t do with Parent PLUS Loans, so let’s bust those right now.
People think if you have Parent PLUS Loans, you cannot:
- Qualify for Income-Based Repayment (IBR)
- Qualify for Pay-As-You-Earn Repayment (PAYE)
If you are on the standard 10-year repayment plan for your Parent PLUS Loan, you are eligible for Public Service Loan Forgiveness (PSLF). However, since PSLF requires 120 payments (or 10 years of payments), you’ll have nothing left to forgive at the end.
Options for Repaying Parent PLUS Loans
1. Using PSLF For Parent PLUS Loans
Many parents have a misconception that Parent PLUS loans aren’t eligible for loan forgiveness for public servants, also called the Public Service Loan Forgiveness Program. They are eligible for this benefit but face significant hurdles to qualify.
Here’s an example that might apply to you. You’ve worked for decades in the public sector and wonder if there’s a way that you can get your experience to count retroactively for the 10 years of payment history needed to receive tax-free loan forgiveness.
There are several catches. To get Parent PLUS loan forgiveness, you must:
- Consolidate Parent PLUS into a Direct Consolidation Loan
- Make Payments on the ICR Plan for 10 Years on the new Consolidation Loan
- Work Full time at a Qualifying 501c3 or Government Employer
You might ask what the ICR program is? It stands for Income Contingent Repayment (ICR). This plan requires you to pay 20% of your income above the federal poverty line for your family size.
Parent PLUS Payment Example
For example, if your AGI (Adjusted Gross Income) on your tax return is $42,000 and your family size is 2, you would deduct $16,460 from the AGI and multiply the result by 20%.
Hence, the ICR payment in this scenario would be $5,108 over the course of the year, which would be split up into monthly payments of about $425.66.
The issue with the ICR program is that your payments can get very high very quickly. Other income-based programs like REPAYE and PAYE only ask for 10% of your income and they give you a higher deduction. These payment plans are not available for Parent PLUS loans.
Hence, the typical parent who would pay off her Parent Plus loans before receiving any forgiveness. Usually, parents have not consolidated their loans yet before they contact me, which means the additional 10 years of full-time work usually kills the idea as well. For some though, PSLF could be a saving grace.
2. Refinancing Parent Plus Loans into Your Name Only
If you want to know how to Pay Off Parent Plus Loans quickly in 2020, refinancing is worth looking into. Virtually every major lender will agree to refinance Parent Plus loans into your name only. After all, Parent Plus loans are legally your responsibility, not your child’s.
Some parents prefer to keep it that way. The most common arrangement I’ve seen with clients and readers is, “I’ll pay for undergrad, but you pay for everything after that!”
Of course, some parents take the other side and view this loan as their kid’s loan that they’ll take on once they’re able. There’s no right or wrong answer but choosing between these approaches carries big implications for your lifestyle.
Don’t Let High Student Loan Payments Reduce Your Retirement Savings
If you plan to refinance Parent Plus student loans into your name alone, you need to plan on working for another 10 years. Your 50s and 60s are prime years for deferring money for retirement. It’s very likely that you’ll be in a lower income tax bracket once you quit working.
Furthermore, you can make $6,000 catch-up contributions to 401k and 403b accounts. This increases your max retirement contribution to an employer account all the way to $25,000 as of 2019. If you’re married, multiply that number by 2 for the total contribution you could make together.
Parent PLUS loan repayment can make those contributions more difficult. I suggest that if you do refinance Parent Plus that you get rid of it in a hurry. You want to shoot for a repayment period of fewer than 5 years, so you can go into retirement unburdened.
For example, a parent with $30,000 of Parent Plus loans could refinance that amount to a 3.5% interest rate and pay $546 a month to have it all done within 5 years.
That kind of payment is very doable if your child’s loan is a low to mid five figure balance. You’d also save thousands of dollars in interest by refinancing.
For balances below $50,000, refinancing is usually the way to go. However, when you have more than that, the math gets much more challenging.
You should not refinance Parent Plus if you’re planning to use Social Security for most of your retirement income. As we’ll see later, the math just doesn’t make sense.
3. Refinancing Parent Plus Loans into Your Child’s Name Only
Only Commonbond and Laurel Road will allow you to refinance your Parent Plus loans into your child’s name alone.
This is a very popular option with families who had to take out loans for multiple kids for school. To transfer a Parent PLUS loan to a student or recent grad, you can refinance the debt into the child’s name. It’s far superior to just having your kid write a check to you for the monthly payment.
After all, you’re paying the government 7% or more on a Parent Plus, which doesn’t make sense when you can slash that interest cost by refinancing.
The process is more cumbersome when you’re refinancing Parent Plus loans into your child’s name, but it’s very doable.
If you’re going to transfer the debt to your child’s name, you want to make sure that your kid is very financially stable. There’s nothing worse than having your entrepreneurial ambitions restrained by a huge required monthly payment.
You cannot consolidate the loan to your kid’s name and keep it in the federal system, unfortunately. The only way to get a Parent Plus loan payment based on income is to use the final of the four strategies for paying back Parent Plus.
4. Going For Parent Plus Loan Forgiveness as a Retiree
I have seen incredibly little written about this strategy online, and using Parent Plus loan forgiveness as a retiree could allow your family to keep vastly more wealth and allow you to retire sooner.
If I’ve got your attention from that, then good because this stuff can get confusing.
The only way to get payments based on income with Parent Plus is through federal direct consolidation. When consolidating, you only want to include Parent Plus loans.
That’s because the new Direct Consolidation Loan will only be eligible for ICR, and you don’t want to mess up loans you took out for your own education that wasn’t for your children.
Once you call your loan servicer and secure the consolidation, now your payments are 20% of your income (specifically Adjusted Gross Income or AGI) after deducting 100% of the poverty line for your family size.
This Strategy Works Well for Retirees Depending on Social Security
This is an absolute game-changing strategy for someone with more than $100,000 of Parent Plus loan debt who relies on Social Security for most of their retirement income. In fact, according to AARP, about 49% of elderly Americans rely on Social Security for the majority of their retirement income. About 24% rely on it for over 90% of their retirement income.
We don’t have great data on this, but I’d guess that the population of Parent Plus borrowers is not as rich as elderly Americans on average, otherwise why borrow for your kid’s school right?
Hence, I guess there are hundreds of thousands if not millions of Parent Plus loan borrowers who will have a modest income in retirement.
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Options To Lower Your Parent PLUS Loan Payments
However, there are still options available to lower your student loan payments. Each one requires careful consideration of the pros and cons to see what’s right for you.
Change Your Repayment Plan
First, you can still change your repayment plan to:
- Graduated: Graduated repayment starts off with monthly payments at or slightly above an interest-only payment and increases the monthly payment every two years. The final payment is no more than three times the initial payment.
- Extended: Extended repayment extends your repayment term to 12, 15, 20, 25, or 30 years, depending on the amount owed. This will lower your monthly payments to be level across the new loan term.
With both of these plans, you will see lower payments. However, with the graduated plan, these payments will rise over time. With the extended plan, the payments will remain the same.
The drawback of both of these options is that you will pay more interest over the life of the loan. However, if the affordability of the monthly payment is your key obstacle, then interest shouldn’t matter too much.
Refinance Your Loan
Second, you could refinance your Parent PLUS Loan into a private student loan. Private loans typically offer lower payments and lower interest rates, however, many of these low rates are variable and could rise over time. But, for many, the much lower payment makes up for any potential rise in the future.
FAQ for Parent PLUS Loans
Here are some of the more common questions we get from parents who owe a ton of debt for their child or children’s education.
1. Can a Parent PLUS loan be transferred to the student?
Yes, students can take on their parents’ PLUS loans by refinancing through a couple private lenders mentioned earlier in the article.
2. Can Parent PLUS loans be on income-based repayment?
Federal Parent PLUS loans are not eligible for Income Based Repayment, Pay As You Earn, or Revised Pay As You Earn. The only income driven plan Parent PLUS is eligible for is Income Contingent Repayment (ICR). Even then, you must consolidate your Parent PLUS through studentloans.gov to be eligible.
There is a potential loophole called “double consolidation” that could allow Parent PLUS borrowers to access better repayment plans than ICR. In practice, this is very difficult to execute on your own.
3. Can you refinance a Parent PLUS loan?
Yes, you can refinance through a private lender if you wish to pay off your loans faster and you’re not planning to use Social Security for most of your retirement income. Our refinancing partners have best in class welcome bonuses paid in addition to lower interest rates.
4. Is a parent PLUS loan tax deductible?
The interest you pay towards a student loan, including a PLUS loan, may score you a break at tax time. Currently, the most you can deduct is either $2,500 or the total amount of student loan interest you paid, whichever is less. This is an above the line deduction, meaning you do not have to itemize to claim it.
The student loan interest deduction is subject to a phaseout based on income.
5. What happens if you don’t pay on a Parent PLUS loan?
If you don’t pay off parent plus loans in 2022, it will go into default. The government can garnish your wages or Social Security to get paid, so do not take this action as there are better options available.
You may have been happy to fund your child’s education but paying off a Parent PLUS Loan can be burdensome and take time.
You will be repaying the debt for 10-25 years regardless of the option you select. Choose a repayment option that works for you and your family and stay the course.
Parent PLUS loans do not have prepayment penalties, so you can pay off parent plus loans in 2022 sooner than 10 years by making extra payments on the debt.
Bring in a new source of income or cut items from your budget to get rid of the loan even faster.
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