Students aren’t the only ones who owe student loans. Parents now owe nearly $100 billion of student loans.
Here’s what you need to know – and what do about it.
Student Loans: Parents
The latest student loan debt statistics show there are more than 44 million borrowers who collectively owe $1.6 trillion in student loan debt in the U.S. alone. According to Make Lemonade, student loan debt is now the second highest consumer debt category – behind only mortgage debt – and higher than both credit cards and auto loans. There are 3.6 million borrowers who collectively owe $96.1 billion in Parent PLUS Loans. This amount does not include Parent Loans, which can be borrowed from private lenders. The fact that parents are carrying student loan balances for their children’s education has created a financial strain for many parents, who may depend on Social Security and have limited other sources of income. Some parents are even working longer to pay off student loans.
How Does A Parent PLUS Loan Work?
A Parent PLUS Loan is a federal loan from the U.S. government that a parent borrows on behalf of a dependent undergraduate student to finance the dependent’s education. For the 2019-2020 academic year, the interest rate on a Parent PLUS Loan is 7.08%, and the one-time fee is 4.236% of the amount borrowed. First, like all federal direct loans, each borrower receives the same interest rate regardless of credit score. Therefore, a borrower with an excellent credit score could be charged a relatively higher interest rate than they could receive with a private lender through a Parent Loan. Second, unlike federal student loans, Parent PLUS Loan borrowers are limited to Income Contingent Repayment (ICR) as their only choice for income-driven repayment.
So, what can parents do to pay off Parent PLUS Loans faster? Here are two options to consider.
1. Transfer Parent PLUS Loan To Your Child
You can “transfer” your Parent PLUS Loan indirectly through Parent PLUS Loan refinancing, which is similar to student loan refinancing. The result is a lower interest rate and your child becomes financially responsible for the new student loan. To get approved, a private lender evaluates the financial and credit profile of your child graduate. This benefits you, since you may be retired or nearing retirement, and your income may be limited. When you refinance Parent PLUS Loans, the child graduate becomes the sole borrower and the parent is effectively absolved of any financial obligation.
2. Refinance Parent PLUS Loans
If you don’t want to transfer your Parent PLUS Loan to your child, you can refinance a Parent PLUS Loan with a private lender, get a lower interest rate and save money. The result is a new loan with a lower interest rate and lower monthly payment, which can save interest costs. To get approved for Parent PLUS refinancing, you need stable and recurring income, current employment, good monthly cash flow, and a low debt-to-income ratio.
This student loan refinancing calculator shows you how much money you can save by refinancing your Parent PLUS Loans.
For example, let’s assume that you have a $70,000 Parent PLUS Loan at an 8% interest rate, and can refinance with a 3% interest rate. You could save $173 per month and $20,804 overall.