Parents are borrowing more to send their children to college and struggling to repay those loans, says a new study from The Brookings Institution.
Here’s what you need to know and what to do about it.
Latest Student Loan Debt Data: Parent PLUS Loans
According to recent data, at least 3.4 million Parent PLUS borrowers owe $87 billion (not including any consolidated loans). That represents approximately 6% of total outstanding student loan debt of $1.5 trillion.
The rise in Parent PLUS Loans has been driven by increased tuition, the elimination of borrowing caps and regulatory changes, among other reasons.
Today, the average Parent PLUS Loan balance is $25,600, with annual borrowing amounts having more than tripled over the last 25 years.
What Is A Parent PLUS Loan?
A PLUS loan is a federal loan that graduate students, or parents of dependent undergraduate students, can borrow to pay for college or a career school. Parent PLUS Loans, in particular, refer to loans borrowed by parents on behalf of a dependent undergraduate student.
The parent is the borrower, and the lender is the U.S. Department of Education. A parent can borrow an amount up to the cost of attendance, less any financial assistance received.
Each year, Congress sets the rates on federal student loans, including Parent PLUS Loans. For the 2018-2019 academic year, the interest rate on a Parent PLUS Loan is 7.6%, and the one-time fee is 4.248% of the amount borrowed. For parents who borrowed a Parent PLUS Loan from 2006-2013, the interest rate was even higher at 7.9%.
Like all federal direct loans, each borrower receives the same interest rate regardless of credit score. Unlike federal student loans, Parent PLUS Loan borrowers are ineligible for income-driven repayment plan and many borrower protections.
Next Steps: How To Pay Off Parent PLUS Loans
If you are a parent borrower, student loan refinancing can help you alleviate the financial burden of your Parent PLUS Loans, and there are two primary approaches to consider:
- Refinance a Parent PLUS Loan in your name
- Transfer the Parent PLUS Loan to your child graduate to refinance in his or her name
Option #1: Refinance A Parent PLUS Loan
A parent borrower can refinance a Parent PLUS Loan with a private lender.
When you refinance your Parent PLUS Loans, the process is similar to student loan refinancing.
As the parent borrower, you obtain a new student loan at a lower interest rate and use the proceeds from the new loan to repay your existing Parent PLUS Loan.
The result is a new loan with a lower interest rate and lower monthly payment, which can save interest costs.
You are still the borrower and are financially responsible for repayment for the loan, but the federal government is no longer the lender.
To get approved for Parent PLUS refinancing, a private lender will evaluate several factors, which may include your income, employment, monthly cash flow, other debt obligations and debt-to-income ratio.
Although the Parent PLUS Loan is still in your name, your child voluntarily may make payments on your behalf to help share responsibility.
Option #2: Transfer The Loan To Your Child Graduate
While the federal government does not provide a mechanism to transfer a Parent PLUS Loan to your child, you can use student loan refinancing to transfer the Parent PLUS Loan to your child.
The option would be similar to Option #1, but now your child graduate would become financially responsible for the new student loan.
The lender would evaluate the child graduate’s underlying financial picture, and the child graduate would become the sole borrower.
For many graduates, now that they are employed and have developed a credit history, they are in a better financial position to obtain a lower interest rate.
Also, if a parent borrower does not have strong credit, and a child borrower does, it may make more sense for the child borrower to refinance the loan in his or her name.
The general rule for student loan refinancing still applies: the stronger the financial profile, the lower the interest rate.
How Much Money Can You Save Through Student Loan Refinancing?
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 $50,000 Parent PLUS Loan at an 8% interest rate, and let’s assume that you can refinance with a 3% interest rate.
You can save $14,860 and lower your monthly payment by $124 per month.
While Parent PLUS Loans can be expensive, there are proactive measures that you can take to lower the cost and pay off Parent PLUS Loans faster.
More Info: forbes.com