As each student puts together their unique strategy to finance college, plans often include scholarships and grants, along with savings and student loans taken out by the student.
Sometimes, though, that’s not enough, so maybe you’re considering taking out a Parent PLUS loan to help your child finance college—or maybe you’ve already taken out one of these loans. In either case, it’s never too soon to think about the most effective way to repay this debt.
The U.S. Department of Education provides these Direct PLUS Loans, and they can be taken out by a parent to fund their child’s education. Grandparents can also take out these loans, but only if they have legally adopted the student. Before applying, the student and parent must fill out the Free Application for Federal Student Aid (FAFSA®), then the parent can apply for a Direct PLUS Loan for Parents.
Read on to learn more about:
• Further information on Parent PLUS loans
• Questions parents often want answers to, including, “Can you transfer a Parent PLUS loan to the student?”
• Pros and cons of that process
• The role that refinancing can play in Parent PLUS loans
Parent PLUS Loan overview
If you’ve ever co-signed for your child on a loan, this may feel similar. But, a Parent PLUS loan is not a co-signed loan. It’s made to the parent for their child’s education. Unlike the federal student loans taken out by students themselves, parent borrowers must pay an origination fee for each Parent PLUS loan. Further, these loans are not subsidized, which means interest accrues on the principal balance from day one of fund disbursement.
As far as the initial question posed (Can Parent PLUS loans be transferred to students?), the answer is “it’s complicated.” It can’t be done through the federal loan program. And while there are a few private lenders that will allow a child to take out a refinanced loan to pay off their parent’s PLUS Loan, it’s not technically a transfer. Let’s get into it.
Pros and cons of Parent PLUS loans
From a student’s perspective, a Parent PLUS Loan can be a great way to help get their education funded without taking on more debt. As a family, you can agree that the student will make these payments, but, legally, this is the parent’s debt, not the student’s.
From a school’s perspective, this helps students pay for their education costs, so it’s a win for them. From a fill-the-gap perspective, these loans allow you to apply for whatever amount is needed to pay the school-certified cost of attendance not already covered by other means.
These loans are pretty straightforward to get because debt-to-income ratios are not a factor, and a parent’s ability to get one is not limited by income. Credit history is factored in, and an adverse credit history can affect approval.
Adverse credit history, in this case, can include foreclosures, bankruptcy discharges, repossessions, defaults, wage garnishments, current delinquencies and more. If you believe your credit circumstances qualify as adverse, you may still be able to be approved for funds, especially if you get an endorser who doesn’t have these credit challenges.
Parent PLUS loans also may be eligible for loan forgiveness programs, income-driven repayment plans and other repayment benefits associated with federal student loan programs, including deferment and forbearance options.
Challenges with Parent PLUS loans include the fact that, because there isn’t a limit on the amount that can be borrowed as long as it doesn’t exceed college attendance costs, it can be easy to take on significant amounts of debt .
Plus, this debt may prevent parents from maintaining their own emergency savings accounts, retirement savings and so forth—and interest rates may be higher than on some private parent student loan options. In fact, there is only one Parent PLUS interest rate available—set annually—regardless of the creditworthiness of the applicant.
Back to those private parent loans for a moment. Rates and terms vary significantly, so you might want to shop around and read the terms carefully. Interest rates may be lower than the Parent PLUS Loan, especially if you have good credit and other solid financial stats, but there may be fees, caps on what you can borrow and limits on repayment options.
Another option is a home equity line of credit (HELOC). If you have equity in your home, you can often get a relatively low-interest rate on your HELOC, but your home would be on the line and you may have limited equity to tap into. There are no deferment or forbearance options either, and these loans have several requirements and restrictions.
Now, back to the idea of transferring the loan.
Can a Parent PLUS Loan be transferred to the student?
This question often comes up, and as was said earlier, the short answer is “it’s complicated.” There is no federal loan program that will allow you to transfer your Parent PLUS Loan to your child. And you technically can’t transfer the loan, even through a private lender. However, with a select few private lenders, your child can take out a refinanced loan and use it to pay off their parent’s PLUS loan.
If your child hasn’t refinanced, then you could create an agreement through which they will give you the money to make the payments. But, if your child already has significant student loan debt, they may not be able to meet current obligations and have enough left over to pay you. Circumstances differ.
Parent PLUS refinancing
Because Parent PLUS interest rates can be high relative to other federal student loans, refinancing these loans to hopefully obtain a lower interest rate might be appealing. If your child takes out a refinanced loan, he or she could use it to pay off your Parent PLUS Loan, thereby getting the debt out of your name. This may take the financial stress off of you and allow your child to build credit.
Through Parent PLUS refinancing, existing parent student loans may be able to be consolidated and refinanced into one new loan, ideally at a lower interest rate. A better rate might allow you to pay less interest over the life of the loan—and if you also shorten your loan term, you can potentially get the loan paid off more quickly.
When you refinance Parent PLUS loans, you do lose borrower protections provided by the federal government, such as income-driven repayment plans, forbearance and deferment.
If the concept of refinancing your Parent PLUS Loan appeals to you, here are five potential considerations. If you’re nodding your head as you read them, then refinancing may be the right choice for you.
1. Your Parent PLUS Loan has a higher interest rate than you’d like.
2. Your principal balance is large.
3. You’ve taken good care of your personal finances.
4. Your income is predictable.
So, can Parent PLUS loans be transferred to the student? The answer is that your child may be able to apply for a student loan refinance and use that refinanced loan to pay off your Parent PLUS Loan.
Or, if you as a parent would like to refinance your Parent PLUS Loan to potentially qualify for a lower interest rate or better loan terms, you can do so—though that would mean keeping the debt in your name. What you can’t do, unfortunately, is transfer your Parent PLUS loans to your child through any sort of federal program.
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