We know you wanted to do right by your child – or children – but here you are now just like one of the millions of 30-somethings with a huge load of debt on your Parent PLUS student loans. And you may have fallen victim to borrowing more than you should have just as your child did.
As you may know dependent undergraduate students are allowed to borrow up to $31,000 in unsubsidized and subsidized student loans. Something else you may have learned is that you could borrow up to the cost of attending school – less what other aid your child or children received. Unfortunately, this can add up very fast. There are more than 3 million Parent PLUS borrowers that owe a total of almost $62 billion, which comes out to about $20,000 each.
Face it, your best years are probably behind you
What can make matters even more difficult is the fact that your best earning years are probably behind you. And you cannot transfer your Parent PLUS student loans to your child nor can they be consolidated with your child’s federal loans. Fortunately, there are ways that you can take some of the sting out of having to repay them.
Consolidate and move to an income-contingent plan
Income-contingent repayment programs are not as generous as Pay As You Earn but they could be a good option if you want to consolidate your current PLUS loans. The way it works on Income-contingent Repayment is you will be required to pay 20% of your discretionary income for as long as 25 years. However, you will not be required to meet any income requirements to be eligible. Even if you have just one large loan, it could be good to consolidate so you would qualify for Income-contingent Repayment as this could be a good solution. If you consolidate a Parent PLUS loan, it’s no longer a Parent PLUS loan but a consolidated loan. You could then repay it through Standard 10-year Repayment, Extended Repayment or Graduated Repayment, which is where the payments start low but then gradually increase every two years.
Check out public service loan forgiveness
If you work in a qualified government or nonprofit job that could qualify for public service loan forgiveness, you could get your remaining debts forgiven after 120 on-time payments and you would not even be required to pay taxes on the amount that’s forgiven. However, if you stay on the Standard 10-Year plan, there will, be nothing left to forgive after 10 years of payments. But if you move to the Income-contingent plan, you could see some amount of your debt erased by the government.
The risks of refinancing
It’s possible you could refinance those Parent PLUS loans through a private group. You as a parent are usually a pretty good candidate for refinancing and the chances of being approved are good. You could even find that refinancing lowers your interest rate. The interest rate on Parent PLUS loans is currently 7.21%. There is one bank that offers this option to Parent PLUS Borrowers where you could refinance at a rate as low as 4.74% while variable rates begin at 2.31%. However, it’s important to know that refinancing a Parent PLUS loan has a downside, which is losing the protection of federal government programs. This would also not be a good strategy if you are having a difficult time repaying your PLUS loans because it could be really hard to get approved.
Review your entire financial picture
You’re a very different borrower than your son or daughter and have different concerns and different assets. You may also be nearing retirement, which can make things even trickier. The unique balancing act of playing off those Parent PLUS student loans against your retirement accounts and other obligations is an area where you really need to look at how this is going to impact the whole family down the road.
The news is good if you were a student borrower. Chances are you’re on the Standard 10-Year Repayment program. You have a fixed interest rate and fixed payments until you’ve retired your debt. In the event you’re having a problem repaying your student loans under this program, you do have the same options as those available to Parent PLUS borrowers.
This can be a very good option for young people just out of school that are struggling to start their careers. The way it works is that your payments start low but then gradually increase every two years. The idea is that by the time you reach year seven or eight you will be in a much better financial position and more able to meet the higher payments.
This program does just what its name implies. It extends your repayment schedule from 10 years to as many as 30. If you owe a ton of student debts and are not afraid to take on a 30-year obligation, this could be a good alternative. While it would take you much longer to pay off the loan your monthly payments would be much less than with Standard 10-Year Repayment.
There are also the three income-driven repayment programs mentioned above that cap your monthly payments at either 20%, 15% or 10% of your discretionary income. Pay As You Earn is the one that caps monthly payments at 10% of your household income that exceeds 150% of the federal poverty guideline based on the size of your family. If you were to select this plan, your payments would change yearly, as they would be adjusted based on any changes – either positive or negative – to your household income. You would have up to 20 years to repay the loan and after those years any remaining debt would be forgiven but taxed.
Here’ by s an example of how this works:
Monthly Adjusted Gross Income: $4,280
(minus) 150% of Poverty Line: $1,480
Discretionary Income = $2,800
(multiplied by) (3) x.10%
Monthly PAYE Payment $280
So as you can see if you were to qualify for Pay As You Earn you would have a very reasonable monthly payment.
The second Income-driven Repayment plan is Income-based Repayment. It is very similar to Pay As You Earn except it generally caps your monthly payment at 15% of your discretionary income but would never be more than the 10-Year Standard Repayment plan amount.
Finally, there is Income-contingent Repayment. It has basically no eligibility requirements but caps your payment at 20% of your discretionary income or what you would pay on a plan that had a fixed payment over the course of 12 years and adjusted based on your income.