Student loan debt has been growing rapidly in America, with more than $1.2 trillion now owed. While most of the press has been focused on the impact this debt has on students, parents have also been going further into debt to fund the education of their children. The most common way for parents to borrow money is via the PLUS loan, which is not cheap. For parents taking out loans today, the interest rate is 6.84% and the fee is a shocking 4.272%. Historically, the interest rates were even higher.
In addition, many parents co-signed on loans taken out by their children. I speak to many parents every week who are struggling to qualify for mortgages or auto loans because of the student loan debt appearing on their credit reports.
There are valuable options out there for parents today. If you are struggling to make your payments on time, you can get relief by taking advantage of the federal income-contingent repayment program. If you have no problem making the monthly payments, but want to pay lower interest rates, you can refinance your debt with a private lender. And your child could potentially take advantage of a co-signer release program or refinance their debt to remove the parent from the obligation. I will explain each of these options below in more detail.
Struggling To Make Payments: Consider An Income-Contingent Repayment Plan
With an income-contingent repayment plan, your monthly payment is capped at 20% of your discretionary income, orwhat you would pay on a repayment plan adjusted to your income with fixed payments for 12 years. You can renew enrollment in the plan every year, for up to 25 years. After 25 years, any remaining balance will be forgiven. However, the forgiven amount could be taxable. The government has created a calculator which can help you understand how much your monthly payment would be.
In order for your federal PLUS loan to be eligible, you must consolidate your loans first. Although the name consolidation implies that you need to have multiple PLUS loans, you do not. You can actually consolidate a single PLUS loan. Once consolidated, you can then apply for income-contingent repayment. You can learn more about consolidating your PLUS loan at the Department of Education website.
The process can take a few months, so be prepared to navigate a potentially complicated process. But just remember the following:
- If you have a Federal PLUS loan, you can be eligible for income-contingent repayment.
- You have to consolidate your PLUS loans first. Even if you only have one PLUS loan, you can still “consolidate.”
- Once consolidated, you can apply for income-contingent repayment, which will cap your monthly payment based upon an affordability calculation.
- You have to renew enrollment every year. Your discretionary income is based upon your income and family size. Every year, your payment could be adjusted based upon changes in both income and family size.
- After 25 years of enrollment, any remaining balance will be forgiven. However, the forgiveness will likely be taxable.
If you are struggling to make your monthly payment, this can be a great option.
Tired Of The High Interest Rate: Consider Refinancing
If you feel comfortable making your payment, but are tired of the high interest rate, you should consider refinancing your PLUS loan. A number of companies have started offering extremely competitive rates to borrowers with good credit scores, stable income and a record of on time repayment. SoFi, a leading marketplace lender, offers variable interest rates as low as 1.90%, and fixed rates as low as 3.50%. DRB, a bank, also offers refinancing options.
Another option you might want to consider is a Home Equity Line of Credit. For borrowers with excellent credit scores and equity in their home, banks are once again aggressively marketing lines of credit with interest rates that are frequently below 3%. In addition, the interest paid on a home equity line of credit can be tax deductible.
Given the high interest rates of PLUS loans, either of these options could provide considerable savings.
Remove Yourself From Your Child’s Loan
Many parents have co-signed on their child’s loan. From a credit perspective, co-signing can have the same impact as owing that debt yourself. If your child has a good job and is making student loan payments on time, you should focus on removing yourself from the loan.
One option is via a cosigner release program. The requirements vary by lender and program, but they typically require that the borrower has graduated from university, has a job, has sufficient income to make the payment and has an on-time payment history. For example, Sallie Mae requires 12 on time payments before the co-signer can be released.
But if your child meets all of the requirements of the co-signer release program, he or she may want to consider refinancing their loan to reduce the interest rate. The goal is for your child to qualify on his or her own, without needing a co-signer. The refinance market is highly competitive, and borrowers can find variable interest rates as low as 1.90% and fixed rates as low as 3.50%. There are a lot of options out there to refinance. MagnifyMoney (my website) has found 19 companies, and that number will only continue to grow. You should encourage your child to apply to as many providers as possible to find the best rate. FICO encourages people to shop around for the best rate. Within a 30 day period, all of your applications will only count as one application, having a minimal impact on your credit score.
Your child should weigh one big risk before refinancing federal student loan debt. Once federal debt becomes private, the ability to take advantage of income-based repayment programs is eliminated. If your child is highly confident in his or her ability to pay off the student loan debt in a short time frame, that might not matter. But, over a longer time period, you never know when income-based repayment might be needed.