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.
Interest rates on federal student loans are set to rise for the second year in a row. This table shows the interest rates for new loans made on or after July 1, 2018, through June 30, 2019. The interest rate is fixed for the life of the loan.
|New rate 2018-2019||Old rate 2017-2018||Available to||Borrowing limits|
|Direct Stafford Loans: Subsidized*
|5.045%||4.45%||Undergraduate students only
Subsidized loans are based on financial need as determined by the federal aid application (FAFSA)
|For dependent undergraduates:
1st year: $3,500 subsidized
2nd year: $4,500
3rd, 4th, 5th year: $5,500
|Direct Stafford Loans: Unsubsidized*
|5.045%||4.45%||Undergraduate students only, all students are eligible regardless of financial need. FAFSA must be submitted.||For dependent undergraduates:
1st year: $5,500
2nd year: $6,500
3rd, 4th, 5th year: $7,500
|Direct Stafford Loans: Unsubsidized
Graduate or Professional Students
|6.595%||6%||Graduate or professional students only; all students are eligible regardless of financial need.
Unsubsidized loans only.
|$20,500 per year (unsubsidized only); max $138,500 ($65,500 subsidized)|
|Direct PLUS Loans:
Parents and Graduate or Professional Students
|7.595%||7%||Parents of dependent undergraduate students and graduate or professional students.
Unsubsidized loans only
|The total cost of education, minus any other aid received by student or parent.|
What’s the difference? With subsidized loans, the federal government pays the interest that accrues while the student is in school, during the six-month grace period after graduation, and during any loan deferment periods. With unsubsidized loans, the borrower is responsible for paying the interest during these periods. Only undergraduate students are eligible for subsidized loans, and eligibility is based on demonstrated financial need.
The subsidized and unsubsidized Federal Direct Loan program are all under the same “umbrella.” What this means is that there are not two separate maximum loan amounts, the way it might appear at first glance.
For example, for undergraduate freshmen, the maximum loan amount a student can receive from the Federal Direct Loan is $5,500. Of that amount, $3,500 may be subsidized based on financial need. So, when the government says that there is a $31,000 maximum limit to what a student may receive in the Federal Direct Loans, $23,000 of that amount may be subsidized. There are not two discreet limits – one at $23,000 and one at $31,000 for a total of $54,000. The unsubsidized limits are contained within the subsidized limits.
Before taking out any loans, consult with a loan officer and, if possible, a financial advisor with college planning experience. There are excellent loan repayment options available and the earlier you construct a plan that incorporates loan repayment, the less likely you are to get blindsided by debilitating monthly payments.
January is typically a strong month for the municipal bond market, but 2018 began with the worst January performance since 1981, driven by rising interest rates and uncertainty over changes in the Tax Cuts and Jobs Act (TCJA).1 The muni market stabilized through April 2018, but uncertainty remains.2 The tax law changed the playing field for these investments, which could affect supply and demand.
When considering these dynamics, keep in mind that bond prices and yields have an inverse relationship, so increased demand generally drives bond prices higher and yields lower, and vice versa. Any such changes directly affect the secondary market for bonds and might also influence new-issue bonds. If you hold bonds to maturity, you should receive the principal and interest unless the bond issuer defaults.
Municipal bonds are issued by state and local governments to help fund ongoing expenses and finance public projects such as roads, water systems, schools, and stadiums. The primary appeal of these bonds is that the interest is generally exempt from federal income tax, as well as from state and local taxes if you live in the state where the bond was issued. Because of this tax advantage, a muni with a lower yield might offer greater value than a taxable bond with a higher yield, especially for investors in higher tax brackets.
The lower federal income tax rates established by the new tax law would cut into this added value, but the difference is relatively small and unlikely to affect demand. Many taxpayers, especially in high-tax states, may find munis even more appealing to help replace deductions lost to other TCJA provisions, including the $10,000 cap for deductions of state and local taxes.3 Tax-free muni interest can help lower taxable income regardless of whether you itemize deductions.
The large corporate tax reduction from a top rate of 35% to 21% is likely to have a more significant effect on demand for munis. Corporations, which own a little less than 30% of the muni market, may hold on to bonds they currently own but become more selective in purchasing future bonds.4
|Federal Income Tax Rate||Taxable Equivalent Yield on 3% Muni|
The supply of new municipal bonds dropped after the fiscal crisis as local governments became more cautious about borrowing. The TCJA further tightened the market by eliminating “advanced refunding” bonds, issued to replace older bonds at lower interest rates, which have accounted for about 15% of new issues.5
This is expected to reduce the supply of bonds for the next three years or so, but the long-term effects are unclear. If interest rates continue to climb, there is less to gain by replacing older bonds, but local governments may issue taxable bonds if they see an opportunity to reduce interest payments. There may also be changes to the structure of future muni issues.6
Munis are considered less risky than corporate bonds and less sensitive to changing interest rates than Treasuries, making them an appealing middle ground for many investors. For the period 2007 to 2016, which includes the recession, the five-year default rate for municipal bonds was 0.15%, compared with 6.92% for corporate bonds. Most of those defaults were related to severe fiscal situations such as those in Detroit and Puerto Rico. The five-year default rate for investment-grade bonds (rated AAA to BBB/Baa) was just 0.05%.7
Treasuries, which are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, are considered the most stable fixed-income investment, and rising Treasury yields, as occurred in early 2018, tend to put downward pressure on munis.8 However, Treasuries are more sensitive to interest rate changes, and stock market volatility makes both Treasuries and munis appealing to investors looking for stability.
The most convenient way to add municipal bonds to your portfolio is through mutual funds, which also provide diversification that can be difficult to create with individual bonds. Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.
Muni funds focused on a single state offer the added value of tax deductibility for residents of those states, but smaller state funds may not offer the level of diversification found in larger states. It’s also important to consider the holdings and credit risks of any bond fund, including those dedicated to a specific state. For example, in October 2017, many state funds still held Puerto Rico bonds, which are generally exempt from state income tax but carry high credit risk.9
If a bond was issued by a municipality outside the state in which you reside, the interest may be subject to state and local income taxes. If you sell a municipal bond at a profit, you could incur capital gains taxes. Some municipal bond interest may be subject to the alternative minimum tax.
The return and principal value of bonds and bond fund shares fluctuate with changes in market conditions. When redeemed, they may be worth more or less than their original cost. Bond funds are subject to the same inflation, interest rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance. Investments offering the potential for higher rates of return involve a higher degree of risk.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1, 8) CNBC, February 28, 2018
2) Bloomberg, 2018 (Bloomberg Barclays U.S. Municipal Index for the period 1/1/2018 to 4/16/2018)
3-4, 6) The Bond Buyer, February 12, 2018
5) The New York Times, February 23, 2018
7) Moody’s Investors Service, 2017
9) CNBC, October 10, 2017