What Are Your Options For Refinancing Parent PLUS Loans?
- January 13, 2016
- Posted by: Dave Rathmanner
- Category: Student Loans
But while you might believe taking out the loan was worthwhile since it meant ensuring your children were able to go to the school of their dreams, you might currently find yourself struggling under the high interest rate associated with the loans. Unlike other federal loans, PLUS loans have relatively high interest rates.
In fact, during the 2015-2016 year, the interest rate on Parent PLUS loans was pegged at 6.84% which is substantially higher than the 4.29% that undergrads were charged on Federal Direct Loans. For those who have Parent Plus loans still outstanding from 2006 to 2013, the interest rate being charged on those loans is even more at 7.9%.
In the past, there weren’t a lot of options when it came to refinancing Parent Plus loans. But recently a number of private loan providers started offering new products to address parents who are looking to refinance Parent PLUS loans.
Here are four of your options for refinancing your loans:
Refinance Using Private Student Loans
Refinancing a Parent PLUS loans with private student loans so that you’re paying a lower interest rate can save you a significant amount of money over the life of the loan. If you have a good job and a high credit score, you should be able to borrow money at a significantly lower interest rate.
This could save you a lot of money. For example, if you owe $10,000 in Parent PLUS loans at an interest rate of 7.9% and are able to refinance at 5.9%, then you will save almost $1,400 over a ten year repayment period. Depending on your credit, you could get an even lower rate than that and save even more.
Another benefit of refinancing your Parent PLUS loan is that you can potentially transfer your loan to your child. Recently, lenders who specialize in student loan refinancing such as SoFi, Darien Rowayton Bank, and Citizen’s Bank have been extending their offerings to include the option of transferring ownership of Parent PLUS loans.
So as long as the child qualifies for student loan refinancing with that lender, Parent PLUS loans can be included when the child refinances their student loans. While this can potentially free the parent from all obligation for the loan, some families decide to have the parents co-sign this new loan since it might qualify the child for a lower interest rate.
But that doesn’t mean that parents have to be on the hook forever. Most of these companies offer something called co-signer release. This means that once a borrower has made a certain number of on time payments, they can apply to have the co-signer removed from the account. This generally ranges from 12-30 payments depending on the provider.
When it comes to refinancing Parent PLUS loans, be sure to read the fine print. Whenever you refinance federal loans into private loans you lose certain protections. However, with PLUS loans, you don’t qualify for income based repayment plans so you only lose the forebearance and deferral options you would have with your federal loans. While many private lenders now offer similar options they are sometimes for shorter periods of time and might have additional conditions. Be sure that you understand what you might be giving up before you refinance.
Refinance Using a Home Equity Line of Credit
Another option for refinancing Parent PLUS loans is to take out a HELOC. A HELOC is a secured loan, which means that it is taken out against the value of your home. The equity you currently have in your home is used as collateral which reduces the risk to banks and allows them to potentially give you a lower interest rate.
Refinancing using a secured form of credit is likely to get you the lowest interest rate but it could put your home at risk. That means that if you have a problem paying back the loan for whatever reason, the bank can come after your home.
It also doesn’t give you forebearance or deferral options in the event that you return to school or lose your job. For some people, the added benefit of a lower interest rate isn’t worth the added risk.
Another interesting aspect of using a HELOC to refinance student loans is that unlike student loans, a HELOC can be discharged in bankruptcy although doing so would likely mean that you would lose your home.
Refinance Using an Unsecured Line of Credit
If you don’t want to put your home up as collateral for your loan, you can potentially get an unsecured line of credit.
The challenge is that these are harder to get. In fact, they are often only available to people who are either making a significant annual salary and/or those who have excellent credit. Because they are unsecured there is more risk to the bank which means that the interest rates are generally higher than with HELOCs.
Other than that, they are exactly like HELOCS in that you will give up some of the benefits of student loans but they are dischargeable in bankruptcy.
Refinance Using an Installment Loan
Like lines of credit, installment loans can be secured or unsecured. Secured installment loans will generally have lower interest rates than unsecured loans but like unsecured lines of credit are hard to qualify for. The main difference between installment loans and lines of credit is that when you pay back a line of credit like a credit card that credit is available to you again.
Positives of Refinancing Parent PLUS Loans
You have several good reasons for transferring your Parent Plus Loan to your child:
Savings: Your child may qualify for a lower interest rate that could save thousands of dollars in interest. Current Parent PLUS Loans have an APR of 6.84%.
Parental Obligation Released: As the parent, you will no longer be responsible for paying back the Parent PLUS Loan.
Child can Build Credit: Young graduates often have scant credit history and credit ratings that are less than good. Refinancing the loan in the child’s name gives the child the opportunity to raise credit scores with on-time payments.
Lender Support: Lenders usually offer support services such as career service, unemployment protection, and networking events.
Soft Pull: The lender can usually provide an interest rate on the new loan via a “soft pull” of the child’s credit history without affecting credit scores. A hard pull will be needed to approve the loan.
Negatives of Refinancing Parent PLUS Loans
There are a few issues to consider when refinancing a Parent PLUS Loan:
Child Assumes Obligation: Your child will become legally liable for a new loan that replaces the Parent PLUS loan. Feelings of guilt OR resentment might arise!
Permanent: Once undertaken, the process cannot be reversed.
Agreement: Parent and child should be in total agreement with regards to refinancing the loan. Some families might find this an obstacle.
Loss of Federal Benefits: Parent PLUS Loan refinancing changes the nature of the loan from federal to private. This means that some of the benefits of the original federal loan are lost, including public service loan forgiveness and income-based repayment options.
Alternatives to Refinancing Parent PLUS Loans
Standard Parent PLUS Loan Repayment Choices
Fix Interest Rate (6.41%) on a Period of 10 Years: this is the standard repayment plan for the PLUS loans. This is a good option as long as the parents can cope with making the monthly payment, while also supporting the dependent child. The advantage associated with this standard plan is the fact that you know exactly how much your monthly payment is, so you can plan ahead and even make advance payments when the personal budget allows it )advance payments are not taxable).
Graduated Rate on a Period of 10 Years: the payments are variable, starting low so that the parents can cope with current expenses and the incipient loan payments. The payments increase every two years, so this payment plan is a good choice for people who expect income increases in the future. Also, if the beneficiary wants to help in paying the loan, the graduated rate is perfect, since it is lower when there is one payer and higher when the parent and child can join forces (or better said "finances"). This repayment plan is not recommended for parents who will retire in less than 10 years.
Extended Repayment Period: this plan can span over a period of 12 to 25 years, according to client's preferences. The monthly payments are smaller, but overall the reimbursed amount of money is higher because of the interest, which is not subsidiary and adds up in time. The plan is suitable for people with low income, who cannot pay a large sum of money every month, but who are capable of working during the period of the loan contract. Paying the monthly loan bill from pension is never a viable solution.
Public Loan Forgiveness Program
Available for parents working in the public sector or in non-profit organizations can apply for a Public Loan Forgiveness. The program erases educational loans which are older than 10 years. The only criterion to be met is to have 120 full, consecutive payments made on time. The state will wipe out the remaining debt after these 10 years. The plan is beneficial for those parents who have opted for a gradual or a long-term loan. Also, the debtors who chose to consolidate their loans have the chance to obtain some kind of forgiveness after 10 years of payments.
The program was established in 2007, so the first loan forgiveness measures will be taken in 2017. If you have not yet applied for this program, it is advisable to calculate how much money will you save and how long you will be able to pay the monthly bills. There are persons who may need to retire in a few years, so they will not afford to make payments for another decade in order to benefit for the Public Loan Forgiveness program.
Make an Informed Decision
No matter what method you use to refinance your student loans be sure that you read all the fine print so that you understand what you’re giving up and what you’re gaining by refinancing your Parent PLUS student loans. Use a student loan repayment calculator to determine how much you’ll save by refinancing so that you can make an informed decision about whether it is worthwhile to refinance.