When children first learn to walk, their parents usually hold their hand until they get the hang of it.
When children learn to ride a bike, their parents often run alongside them holding on until they get control.
In the same way, when children go off to college, parents typically want to help with the costs. College is expensive, after all, and they don’t want their kids to be buried in student debt before they ever really get on their own two feet.
So many parents offer all the support they can—even if they have to borrow the money. Which is why the government created Parent PLUS Loans—federal student loans that are extended directly to biological or adoptive parents (and, in some cases, stepparents) of undergraduate students.
The loans, which allow parents to borrow up to the cost of attendance at their student’s school, minus any other forms of financial aid received by the student, are relatively easy to get. They do require a credit check, but many private lenders have stricter eligibility criteria.
Direct PLUS Loans for parents, commonly called Parent PLUS Loans, are popular. According to the National Student Loan Data System, as of the second quarter of 2019, at least 3.5 million borrowers currently owe a collective $93.9 billion in Parent PLUS Loans.
Unfortunately, that’s becoming a problem. The Brookings Institute reported at the end of 2018 (the most recent report from them on the topic) that repayment outcomes for parent borrowers appear to be getting worse as balances continue to increase.
“Many parents supporting college students are saddled with large debt burdens,” the report states, “ultimately repaying just enough to avoid default and sometimes owing significantly more than their initial balance.”
Well-intentioned borrowing can end up backfiring on parents, who could be making loan payments for years or even decades, depending on the student loan repayment plan they choose.
That might not seem like a big deal when the loan is new—especially if the parents are nowhere near retirement age. But as the payments drag on, long after those children are settled and doing fine—perhaps with families of their own—it might make sense to rethink the debt and how it should be repaid.
For some parents, that could mean refinancing the student loans with a private lender, with the goal of getting lower monthly payment or a lower interest rate.
Some private lenders, like SoFi, allow the child to take out a refinanced loan to pay off the Parent PLUS loan. Or parents could set up an arrangement to have the child pay the Parent PLUS loan once they graduate from college.
Either way, Parent PLUS Loan refinancing is an option for getting that debt load under control. Here’s a guide to some key pros and cons and some steps to getting started:
1. So What Exactly Is Parent PLUS Loan Refinancing?
Parent PLUS Loans are federal loans offered to parents of undergraduate students. Refinancing these loans means consolidating them into one new loan from a private lender, ideally with a lower interest rate and/or better loan terms.
2. What Are the Benefits of Parent PLUS Loan Refinancing?
There are few reasons Parent PLUS Loan refinancing can make sense for a family. Moving to one manageable payment with a potentially lower interest rate might make it possible to pay off the loan faster and for less money overall.
Direct PLUS Loans typically have a higher interest rate than other federal student loans, and competitive private lenders (including SoFi) can potentially offer lower rates to qualifying borrowers.
3. Is There a Downside to Refinancing?
Yes. Federal Parent PLUS Loans come with certain borrower protections that private loans don’t offer. Payments can be deferred, and some or all of the debt may be discharged in the event of parental disability or bankruptcy or if the school closed.
(To make Parent PLUS Loans eligible for income-contingent repayment forgiveness—the only income-driven repayment plan Parent PLUS Loans are eligible for—the loans must be consolidated with a Direct Consolidation Loan—see the next topic.)
These federal benefits will be lost when refinancing to a private loan. However, some lenders offer their own benefits. For example, SoFi member benefits include unemployment protection for those who qualify, career services, networking opportunities, and a rate discount on additional SoFi loans.
4. What’s the Difference Between a Federal Consolidation Loan and Private Loan Refinancing?
A federal Direct Consolidation Loan allows borrowers to combine multiple federal education loans into one more manageable payment.
And it may give borrowers access to additional federal loan repayment plans (including the income-contingent repayment plan). But it’s generally aimed at lowering payments by lengthening the amount of time agreed upon to pay the loan—not by lowering the interest rate.
The new fixed interest rate on a Direct Consolidation Loan is the weighted average of the interest rates on the loans that are being consolidated, rounded up to the nearest eighth of a percent. Also, parents can’t put a federal consolidation loan in their child’s name or transfer their debt to their child. So it is not the same as refinancing a Parent PLUS Loan through a private lender.
5. What Should Families Consider Before Moving Forward With Parent PLUS Loan Refinancing?
When refinancing, the new interest rate and overall eligibility for the loan may be determined by a number of factors. A bumpy credit history can affect a person’s ability to refinance.
Refinancing can be an especially attractive option for those with a steady income and strong credit histories. A borrower’s debt-to-income ratio and ability to pay when making lending decisions are typically also factors, but every lender has different criteria—so shopping around to compare offers is wise.
6. How Can Parents Get a Refinanced Loan in Their Name?
Parents can research the best refinancing interest rates, loan terms, and other benefits online, then apply for a new loan.
If the application is accepted, parents can use it to pay off the Parent PLUS Loan, then begin making scheduled payments to the new lender. The child can make payments on it if they choose as well, but the loan will still be in the parents’ names.
7. Can Parents Use Parent PLUS Loan Refinancing to Transfer That Debt Into the Child’s Name?
The short answer is “no.” The longer answer is, “but there’s another option.”
There’s no federal repayment program that will allow you to transfer your Parent PLUS Loan to your child. If the child is offering (or, at least, willing) to take over the debt, however—and if they have the means to make the payments—refinancing with a private lender can make that possible. In this case, it’s the child, not the parent, who applies for the loan.
With a few private lenders (SoFi included), your child can take out a refinanced loan and use it to pay off their parents’ Parent PLUS Loan. Your child still has to qualify and provide additional documentation (check with each lender to understand what’s required). And just like any would-be borrower, a solid credit history and a secure income (among other factors) help determine the interest rate offered.
If the child’s refinanced loan application is accepted, they can take over their parent’s PLUS loan and start paying it off. If there are any bumps in the road for the child, such as limited work history or adverse credit, parents could agree to co-sign for the new refinanced loan.
It’s important to remember, though, that a co-signer is promising to pay off the debt if the borrower stops making payments. So, parents who co-sign are still on the hook if their child can’t come up with the money every month.
If that scenario has your head spinning, it’s understandable. Refinancing might not be right for every family. But if you’re one of the many Parent PLUS borrowers who ends up with more debt than expected, refinancing to a private loan could be an option worth considering.
Student Loan Refinancing
If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.
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Student Loan Refinancing