Parent PLUS Borrowers’ Guide to Repayment

Repaying a parent PLUS loan while managing your personal finances can be a tough balancing act. If you’ve taken out a parent PLUS loan, it’s important to have a strategy in place for parent PLUS loan repayment.

In this repayment guide, we’ll help you come up with an effective plan of action.

Set your parent PLUS loan repayment game plan

If you’re repaying parent PLUS loans, it’s important to brush up on the terms of the payment: You are responsible for 100% of the loan repayment — not your child. Should your child help out with the payments? Perhaps, but it’s not a requirement.

Unfortunately, parent PLUS loans can be tough to manage with their high interest rates and potentially high balances. PLUS loan borrowers are allowed to take out loan amounts equal to the cost of attendance, minus financial aid, which could mean a hefty balance. The interest rate for parent PLUS loan repayment is 7.08% for loans disbursed on or after July 1, 2019. Plus, there’s a loan fee of 4.236%.

If you have parent PLUS loans, list them out and compare them with your income and expenses. How much can you afford to put toward debt each month? You’ll want to pay off the student loans while saving for retirement. If the 10-year standard repayment plan isn’t feasible, consider your alternatives.

Explore income-contingent repayment

If you are having trouble paying back your parent PLUS loans, look into a different repayment plan. Unfortunately, parent PLUS loans aren’t eligible for income-based repayment or pay-as-you-earn programs.

But they are eligible for income-contingent repayment (ICR) if you consolidate them first via a Direct consolidation loan. Here’s how ICR works:

• Offers a repayment period of 25 years
• Caps your monthly payments at the lesser of either 20% of your discretionary income, or what the payment would be on a fixed, 12-year plan, adjusted according to income
• Forgives loans after 25 years of repayment

It’s important to know that you may owe income tax on student loans that are forgiven.

The income-contingent repayment plan can be helpful if you were having trouble paying back parent PLUS loans. But you’ll pay more in interest and you could face a hefty tax bill.

Consider Public Service Loan Forgiveness

If you are now on an income-contingent repayment plan, you may be eligible for the Public Service Loan Forgiveness program. To be eligible, you must:

• Work full time for an eligible government agency or nonprofit organization
• Make 120 qualifying payments

Through this program, your loans will be forgiven after 10 years of repayment. Submit any required paperwork yearly and stay in touch with your loan servicer about your repayment options.

Look into refinancing parent PLUS loans

Student loan refinancing can be a good option if you have parent PLUS loans. Through refinancing your student loans with a private lender, you merge all your loans into one and — ideally — receive a better interest rate.

Considering the high rates for PLUS loans, refinancing could save money and help pay off your loans much faster. Parent PLUS borrowers are often especially attractive candidates for refinancing, as they might have a stronger credit profile and more income than new graduates.

Typically, refinancing companies want you to have a good credit score, stable employment and enough income to pay back your loans. However, when refinancing, you give up federal loan protections, such as payment plan flexibility and the option to pursue an income-driven plan. Depending on your situation, the benefits of refinancing may outweigh the costs.

Another option is to refinance your parent PLUS loans into loans in your child’s name, which switches the responsibility to them. This is available through online lenders like Laurel Road and SoFi.

Ask yourself how you want to help your child with loan repayment

Parent PLUS borrowers face the unique situation of paying for their child’s education while trying to manage their own retirement savings. Unfortunately, doing both can spread some borrowers thin.

Whether you have parent PLUS loans or you want to help your children pay back their loans, there are a variety of ways to help without compromising your retirement plans.

Understanding your options, having a plan in place and thinking of you and your child as partners in paying back the loan are ways to ensure that both of your financial futures are protected.

If you’re assisting your child with loan repayment, seek the best repayment option.

Become a cosigner

If your child has limited credit history, you could consider becoming a cosigner if they apply for student loan refinancing. Refinancing could save them money on interest. But if they don’t have a strong credit profile and have limited income, they may be rejected for refinancing.

Remember, though, that in this case you are legally responsible for your child’s debt if they can’t pay it back.

In some instances, cosigner release may be an option down the road. For example, Citizens Bank allows for cosigner release after 36 consecutive, on-time payments. The terms of cosigner release depend on the lender, but, typically, the borrower needs to prove they have made on-time payments and have sufficient income to pay back the loans on their own.

It may take some time to be eligible for cosigner release, so think carefully about taking on this responsibility. It’s also a good idea to have a discussion with your child about expectations. What happens if they miss a payment? If they can no longer afford payments due to job loss or another circumstance, are you willing — and able — to step up and make payments? Going through “what-ifs” can help ensure there are no misunderstandings on either side.

Help without cosigning or getting a loan

If you want to help pay back your child’s student loans but don’t want to take out parent PLUS loans or be a cosigner, talk to them about it.

If you decide you want to help in this form, here are some questions to ask yourself:

• How much can you afford to put toward debt each month?
• Will this set you back from your own financial goals?
• Will you give money to your child or will you repay the loan servicer directly? You may be able to become an authorized payer on your child’s loan servicer account.
• How much are you willing to help out? For example, do you want to help out with half or cover all of it? Or help out just a little bit? It’s up to you.
• If you’re assisting as an authorized payer, what happens if your child gets a higher-paying job or you need more money than expected? Setting up informal monthly check-ins to see how your repayment process is going can keep both of you on the same page.

Once you’ve figured out how much you can afford to pay and how much you are willing to pay, talk to your child. It’s important to set expectations and have an understanding of each of your roles in the debt repayment process.

Important questions for parent PLUS borrowers to consider

Should you tap into your retirement funds to pay off your child’s loan debt?

If you want to help your child pay off their student loans, you may have considered tapping your retirement funds. But is this a good idea? Not really.

If you have the money, using retirement funds to help your child become debt-free might feel like the right thing to do. But it would be at the cost of your own financial future.

First, your child hopefully has many working, productive years ahead. They have a chance of turning their financial life around and could have the luxury of decades to pay off their loans. On the other hand, you can’t borrow money for retirement.

You will also be hit with penalties if you withdraw your retirement money early. For example, if you withdraw from your 401(k) before you’re 59 1/2, you’ll pay a 10% withdrawal penalty, in addition to federal and state income taxes.

The same goes for withdrawing funds from a traditional individual retirement account (IRA). Going this route could take a huge chunk out of our nest egg that could cost years’ worth of interest on your child’s loan.

A Roth IRA is a bit more flexible than other retirement vehicles. If you withdraw funds from a Roth IRA, you can do so without any penalties, but you may pay a tax depending on the purpose of the withdrawal.

Regardless, it’s not a good idea to withdraw your own retirement funds to pay off your children’s debt. If you think you have the funds to pay off your child’s debt and comfortably afford retirement, you could consider speaking with your financial advisor about that goal.

Can you gift money to help pay off your child’s student loans?

One way you can help your children pay off their student loans is by gifting them money to make payments. You’ll want to be clear that the money is to be used for student loan repayment and nothing else.

You can gift small amounts for birthdays and holidays, as well as if you get a tax refund. If you’re looking at gifting a sizable amount, though, be aware of the gift tax. You can gift up to $15,000 without any issues, but if you go over that amount, your gift will count as part of your annual exclusion. You’ll have to file a return and fill out Form 709 with the IRS. The good news? You’ll only be hit with a gift tax after you reach your lifetime limit of $11.4 million.

There’s some confusion as parents can avoid the gift tax by making applicable payments for higher education, such as tuition, directly to the university. However, the current tax code doesn’t consider student loan payments as part of those qualified expenses.

Can you pay off a parent PLUS loan early?

Perhaps you came into a financial windfall from an inheritance or sold your family home, and are wondering: Can you pay off a parent PLUS loan early?

All federal student loans allow for penalty-free prepayment. But Is this a good idea? That depends.

Remember: There is no borrowing for retirement. It may make sense to use those extra funds to pad your nest egg and continue making scheduled payments, rather than wipe out the balance. A financial advisor can be helpful in discussing the pros and cons of your options.

Don’t lose sight of your financial goals to help your child

You want the world for your child. But in many cases, the best thing you can do is ensure that your own financial future is as healthy as possible. You don’t want your child to have to worry about your finances if you run out of retirement funds.

Taking care of your own funds isn’t being selfish. It’s being smart, and it’s also teaching your adult child self-reliance. Helping your child by taking out parent PLUS loans can be a huge gift to your children, but make sure you are realistic about your own financial needs.