While you might believe taking out the loan was worthwhile since it meant ensuring your children were able to go to the school of their dreams, you might currently find yourself struggling under the high interest rate associated with the loans. Unlike other federal loans, PLUS loans have relatively high interest rates.
In fact, for the 2018-2019 enrollment year, the interest rate on Parent PLUS loans is pegged at 7.6% which is substantially higher than the 5.05% that undergrads will be charged on Federal Direct Loans. For those who have Parent Plus loans still outstanding from 2006 to 2013, the interest rate being charged on those loans is even more at 7.9%.
In the past, there weren’t a lot of options when it came to refinancing Parent Plus loans. But recently a number of private loan providers started offering new products to address parents who are looking to refinance Parent PLUS loans.
Here are four of your options for refinancing your loans:
Refinancing a Parent PLUS loans with private student loans so that you’re paying a lower interest rate can save you a significant amount of money over the life of the loan. If you have a good job and a high credit score, you should be able to receive better student loan refinance rates to choose from.
This is the most popular option among Parent PLUS Loan borrowers, and rightfully so.
It can save you a lot of money. For example, if you owe $10,000 in Parent PLUS loans at an interest rate of 7.9% and are able to refinance at 5.9%, then you will save almost $1,400 over a ten year repayment period. Depending on your credit, you could get an even lower rate than that and save even more.
Another benefit of refinancing your Parent PLUS loan is that you can potentially transfer your loan to your child. Recently, lenders who specialize in student loan refinancing such as SoFi, Darien Rowayton Bank, and Citizen’s Bank have been extending their offerings to include the option of transferring ownership of Parent PLUS loans.
So as long as the child qualifies for student loan refinancing with that lender, Parent PLUS loans can be included when the child refinances their student loans. While this can potentially free the parent from all obligation for the loan, some families decide to have the parents co-sign this new loan since it might qualify the child for a lower interest rate.
But that doesn’t mean that parents have to be on the hook forever. Most of these companies offer something called co-signer release. This means that once a borrower has made a certain number of on time payments, they can apply to have the co-signer removed from the account. This generally ranges from 12-30 payments depending on the provider.
When it comes to refinancing Parent PLUS loans, be sure to read the fine print. Whenever you refinance federal loans into private loans you lose certain protections. However, with PLUS loans, you don’t qualify for income-driven repayment plans so you only lose the forbearance and deferral options you would have with your federal loans.
While many private lenders now offer similar options they are sometimes for shorter periods of time and might have additional conditions. Be sure that you understand what you might be giving up before you refinance.
If you’d like to compare the best student loan refinancing options, you can use our free app to see prequalified quotes from multiple lenders without hurting your credit. Click here to get started!
Another option for refinancing Parent PLUS loans is to take out a HELOC. A HELOC is a secured loan, which means that it is taken out against the value of your home. The equity you currently have in your home is used as collateral which reduces the risk to banks and allows them to potentially give you a lower interest rate.
Refinancing using a secured form of credit is likely to get you the lowest interest rate but it could put your home at risk. That means that if you have a problem paying back the loan for whatever reason, the bank can come after your home.
It also doesn’t give you forebearance or deferral options in the event that you return to school or lose your job. For some people, the added benefit of a lower interest rate isn’t worth the added risk.
Another interesting aspect of using a HELOC to refinance student loans is that unlike student loans, a HELOC can be discharged in bankruptcy although doing so would likely mean that you would lose your home.
If you don’t want to put your home up as collateral for your loan, you can potentially get an unsecured line of credit.
The challenge is that these are harder to get. In fact, they are often only available to people who are either making a significant annual salary and/or those who have excellent credit. Because they are unsecured there is more risk to the bank which means that the interest rates are generally higher than with HELOCs.
Other than that, they are exactly like HELOCS in that you will give up some of the benefits of student loans but they are dischargeable in bankruptcy.
Like lines of credit, installment loans can be secured or unsecured. Secured installment loans will generally have lower interest rates than unsecured loans but like unsecured lines of credit are hard to qualify for. The main difference between installment loans and lines of credit is that when you pay back a line of credit like a credit card that credit is available to you again.
You have several good reasons for transferring your Parent Plus Loan to your child:
Savings: Your child may qualify for a lower interest rate that could save thousands of dollars in interest. Current Parent PLUS Loans have an APR of 7.6%.
Parental Obligation Released: As the parent, you will no longer be responsible for paying back the Parent PLUS Loan.
Child can Build Credit: Young graduates often have scant credit history and credit ratings that are less than good. Refinancing the loan in the child’s name gives the child the opportunity to raise credit scores with on-time payments.
Lender Support: Lenders usually offer support services such as career service, unemployment protection, and networking events.
Soft Pull: The lender can usually provide an interest rate on the new loan via a “soft pull” of the child’s credit history without affecting credit scores. A hard pull will be needed to approve the loan.
There are a few issues to consider when refinancing a Parent PLUS Loan:
Child Assumes Obligation: Your child will become legally liable for a new loan that replaces the Parent PLUS loan. Feelings of guilt OR resentment might arise!
Permanent: Once undertaken, the process cannot be reversed.
Agreement: Parent and child should be in total agreement with regards to refinancing the loan. Some families might find this an obstacle.
Loss of Federal Benefits: Parent PLUS Loan refinancing changes the nature of the loan from federal to private. This means that some of the benefits of the original federal loan are lost, including public service loan forgiveness and income-based repayment options.
Fix Interest Rate (6.41%) on a Period of 10 Years: this is the standard repayment plan for the PLUS loans. This is a good option as long as the parents can cope with making the monthly payment, while also supporting the dependent child. The advantage associated with this standard plan is the fact that you know exactly how much your monthly payment is, so you can plan ahead and even make advance payments when the personal budget allows it )advance payments are not taxable).
Graduated Rate on a Period of 10 Years: the payments are variable, starting low so that the parents can cope with current expenses and the incipient loan payments. The payments increase every two years, so this payment plan is a good choice for people who expect income increases in the future. Also, if the beneficiary wants to help in paying the loan, the graduated rate is perfect, since it is lower when there is one payer and higher when the parent and child can join forces (or better said “finances”). This repayment plan is not recommended for parents who will retire in less than 10 years.
Extended Repayment Period: this plan can span over a period of 12 to 25 years, according to client’s preferences. The monthly payments are smaller, but overall the reimbursed amount of money is higher because of the interest, which is not subsidiary and adds up in time. The plan is suitable for people with low income, who cannot pay a large sum of money every month, but who are capable of working during the period of the loan contract. Paying the monthly loan bill from pension is never a viable solution.
Available for parents working in the public sector or in non-profit organizations can apply for a Public Loan Forgiveness. The program erases educational loans which are older than 10 years. The only criterion to be met is to have 120 full, consecutive payments made on time. The state will wipe out the remaining debt after these 10 years. The plan is beneficial for those parents who have opted for a gradual or a long-term loan. Also, the debtors who chose to consolidate their loans have the chance to obtain some kind of forgiveness after 10 years of payments.
The program was established in 2007, so the first loan forgiveness measures were taken in 2017. If you have not yet applied for this program, it is advisable to calculate how much money will you save and how long you will be able to pay the monthly bills. There are persons who may need to retire in a few years, so they will not afford to make payments for another decade in order to benefit for the Public Loan Forgiveness program.
No matter what method you use to refinance your student loans be sure that you read all the fine print so that you understand what you’re giving up and what you’re gaining by refinancing your Parent PLUS student loans. Use a student loan repayment calculator to determine how much you’ll save by refinancing so that you can make an informed decision about whether it is worthwhile to refinance.
Most students start investigating colleges in their junior year of high school, though you can certainly start earlier if you want to. Beginning the search a full year before your child needs to apply to college should allow plenty of time to compare schools and help you feel in control of the process. Remember, your child will be spending the next four years at this college–you’ll want to take the time to find a good match. You don’t want your child picking a school solely because his or her best friend is applying there!
Most colleges have websites where you can find detailed information on admissions, academics, financial aid, and student life, as well as take a virtual tour of the campus. In addition, other education-related websites provide general information on selecting a college, careers, and majors, “best of” lists, and student reviews. Keep in mind that some websites may be more reliable than others. In addition, college guidebooks describe and compare colleges down to the smallest details. Ask your local reference librarian or your child’s high school guidance counselor to recommend some of the best resources.
The goal of your research is to create a list of colleges that match up well with your child’s interests and abilities, and your pocketbook.
A couple of excellent and free resources for researching colleges are:
The logical place to begin a college search is with general criteria like size, geographic region, and location (i.e., rural, suburb, city). These are all factors that most students have a keen opinion on. Talk to your child about the type of college environment that he or she prefers.
Next, consider academic factors. If your child knows the subject that he or she wants to major in, make sure to note that the program’s availability and strength. This criterion alone may supersede any general criteria in importance. You’ll also want to look at the median grade point average and SAT/ACT scores of the most recent class. This information will give you an idea of your child’s chances for admission. Do your child’s academic accomplishments place him or her in the top 5 percent of the class, 25 percent, 50 percent, 75 percent? Keep in mind that highly selective colleges usually accept only those students at the very top of the applicant pool. College guidebooks can verify the competitiveness of any particular college. It’s important to be realistic about your child’s admission chances.
Other academic factors to consider include:
It’s likely that you’ll be more interested in financial factors than your child will be. In fact, your own financial constraints may limit your child’s ultimate choice of colleges. It’s important to evaluate colleges from a financial standpoint during the research process so there won’t be any surprises down the road.
First, ask yourself whether the college provides an overall good education for the price. Remember, tuition is not the only cost. Your child will need money for room and board, books and supplies, transportation, and other miscellaneous fees. This combined cost is known as the cost of attendance. Compare the cost of attendance at colleges that interest your child. Next, see whether the college offers any special cost-cutting measures. For example, is there a flexible tuition payment plan that lets you spread costs over 10 or 12 months? A three-year degree program? A five-year joint graduate/undergraduate degree program? A tuition discount for siblings or alumni? An opportunity to take courses online?
You’ll also want to examine the college’s record on financial aid. What percentage of students receive need-based financial aid? Of these, what percentage of students have 100 percent of their need met? If costs are the main concern, you’ll want to target those colleges that consistently meet a high percentage of their students’ financial needs. This statistic is readily available from college guidebooks or the college’s own website. You might also ask what percentage of students take advantage of work-study programs. Does every student who requests a work-study assignment get one? Also very important–does the college offer merit aid (not based on financial need) for academic, athletic, musical, or other abilities? If so, does the student need to fill out a separate application to be considered?
While you’re in the financial arena, now is a good time to discuss any financial concerns with your child. For example, will you expect your child to contribute to his or her education? With savings? With earnings from a summer job? With student loans? And how much? It’s important for your child to have an awareness of the financial implications (for you and for him or her) of choosing a college.
One final note: Even if a college’s sticker price is daunting, your child should consider applying if the college is otherwise a good fit. Remember, the college may award your child a generous financial aid package that may translate into a lower actual out-of-pocket cost for you over four years, compared with a less expensive school on your child’s list that didn’t offer as generous an aid package. Consider setting a financial limit on what you can afford to pay before the acceptance letters start arriving–it may be hard to resist the lure of an acceptance offer from a prestigious university, even if it means overextending yourself financially.
Beyond the general, academic, and financial factors, you and your child will want to consider factors that relate to the quality of life. Here are some questions to think about:
A campus visit can be very helpful when comparing colleges. During such a visit, you and your child should feel free to seek out the opinions of students, teachers, and other employees. Your child may even be able to sit in on a class or “shadow” a current student for a day.
Ideally, you and your child should end up with a manageable list of colleges to apply to. On the list should be a couple of “stretch” schools (it’s a stretch your child will be accepted), a core group of schools where your child fits in well academically (it’s likely your child will be accepted), and a couple of “safety” schools (it’s very likely that your child will be accepted). If possible, your child should apply to schools that directly compete with one another for students (e.g., two small, highly competitive liberal arts colleges in the same geographic region). The reason is that most colleges don’t mind losing students to a more competitive or less competitive school, but they generally don’t like losing students to a direct competitor. As a result, they may compete to offer your child the best financial aid package.
Perhaps your child already understands the basics of budgeting from having to handle an allowance or wages from a part-time job during high school. But now that your child is in college, he or she may need to draft a “real world” budget, especially if he or she lives off-campus and is responsible for paying for rent and utilities. Here are some ways you can help your child plan and stick to a realistic budget:
You should also help your child understand that a budget should remain flexible; as financial goals change, a budget must change to accommodate them. Still, your child’s ultimate goal is to make sure that what goes out is always less than what comes in.
For the sake of convenience, your child may want to open a checking account near the college; doing so may also reduce transaction fees (e.g. automated teller machine (ATM) fees). Ideally, a checking account should require no minimum balance and allow unlimited free checking; short of that, look for an account with these features:
To avoid bouncing checks, it’s essential to keep accurate records, especially of ATM or debit card usage. Show your child how to balance a checkbook on a regular (monthly) basis. Most checking account statements provide instructions on how to do this.
Encourage your child to open a savings account too, especially if he or she has a part-time job during the school year or summer. Your child should save any income that doesn’t have to be put towards college expenses. After all, there is life after college, and while it may seem inconceivable to a college freshman, he or she may one day want to buy a new car or a home.
If your child is age 21 or older, he or she may be able to independently obtain a credit card. But if your child is younger, the credit card company will require you, or another adult, to cosign the credit card application, unless your child can prove that he or she has the financial resources to repay the credit card debt. A credit card can provide security in a financial emergency and, if used properly, can help your child build a good credit history. But the temptation to use a credit card can be seductive, and it’s not uncommon for students to find themselves over their heads in debt before they’ve declared their majors. Unfortunately, a poor credit history can make it difficult for your child to rent an apartment, get a car loan, or even find a job for years after earning a degree. And if you’ve cosigned your child’s credit card application, you’ll be on the hook for your child’s unpaid credit card debt, and your own credit history could suffer.
Here are some tips to help your child learn to use credit responsibly:
Finally, remind your child that life after college often involves student loan payments and maybe even car or mortgage payments. The less debt your child graduates with, the better off he or she will be. When it comes to the plastic variety, extra credit is the last thing a college student wants to accumulate!