Federal Parent Plus loans are borrowed by the parent of a dependent undergraduate student to help the student pay for college. The Parent PLUS loan cannot be directly transferred from the parent to the child. Instead, there are a few options for shifting responsibility for the Parent PLUS loans to the child. But, parents should carefully consider the tradeoffs before adding Parent PLUS loans to the child’s student loan burden.
The parent is solely responsible for repaying a Federal Parent PLUS loan. Even though the student benefited from the Parent PLUS loan, the student is not listed as a borrower on the Parent PLUS loan and is not obligated to repay the debt.
Consider Ability to Repay the Parent PLUS Loan
The first step is to evaluate the current financial situations of the student and parents. Consider the financial goals and the present and future earning potential of all involved.
The parent’s ability to repay a Parent PLUS loan may be limited. Normally, Parent PLUS loans enter repayment within 60 days of full disbursement. But, the Ensuring Continued Access to Student Loans Act of 2008 (ECASLA) allows the parent borrower to defer repaying the loan while the student is in school and for six months after graduation.
Many parents opt to defer repaying the Parent PLUS loan, even though interest continues to accrue on the loan, because they can’t afford the loan payments or they expect the student will make the payments after graduation.
Before transferring a Parent PLUS loan to the student, however, it is important to understand whether the student is capable of repaying the Parent PLUS loan in addition to the student’s own federal student loans.
Some students will not have jobs by the end of the six-month grace period. Even if the student has a job, it may not pay well enough for the student to make payments on both the Parent PLUS loan and the student’s federal student loans. Initially, the student might be able to contribute only partial payments to the Parent PLUS loan, if at all.
The right decision might be to wait until the student is earning enough money to transfer responsibility for the loan payments to the student.
Ultimately, it is the parent’s responsibility to repay the Parent PLUS loan. If the student can’t cover the full payments, the parent will need to cover the shortfall. Otherwise, a late or missed payment will affect the parent’s credit rating, not the student’s. If the student and parent are not able to repay the debt, the parent should ask the loan servicer for a longer repayment term to reduce the monthly loan payment. Another option is to seek a temporary deferment or forbearance until the student is able to start making payments.
If the student has a good job and can afford the Parent PLUS loan payments, then the main options include having the student make the payments on the Parent PLUS loan or refinancing the Parent PLUS loan into a private loan in the student’s name.
Ask the Student to Make the Parent PLUS Loan Payments
One option is to enter into an agreement with your child for the child to make the Parent PLUS Loan payments while the loan remains in the parent’s name.
This solution ensures that the loan terms and repayment plan remain unchanged. A child with little work history and a thin credit history is unlikely to be able to secure a loan without a cosigner. If the parent helps the child qualify for a new loan by cosigning the loan, they are still on the hook financially with the new loan.
Risks of the Student Repaying the Parent PLUS Loan
The risk of having a side agreement with your child is the parent’s credit will be dinged if the child misses a payment or defaults on the loan. This may affect the parent’s ability to refinance their mortgage, buy a car, get a credit card, purchase a second home or help finance a second child’s education. The consequences to the parent for defaulting on the loan are severe and can include legal action resulting in wage garnishment and offset of Social Security benefits.
But, the parent remains in control over a Parent PLUS loan and can make the payments if the child doesn’t.
In order to minimize the risk of non-payment, keep the lines of communication with your child open and confirm that the monthly payments are being made on time.
Transfer the Debt to the Student by Refinancing It
Another option is for the student to obtain a private loan in their own name, and use it to pay off the Parent PLUS loan. This could include a private student loan or a non-education loan.
Note the student will be starting with a brand new loan. New terms, conditions and interest rates will apply. The new interest rate may be much higher than on the Parent PLUS loan, increasing the cost of the loan.
It takes a few years after the student graduates for their credit scores to improve enough for the student to qualify for a loan on their own, without a cosigner, and for the interest rate to be competitive with the interest rate on a Parent PLUS loan. The student will need to make on-time payments on all their debts, not just the student loans, and to have a steady job with a good salary.
Risks of Refinancing a Parent PLUS Loan into a Private Loan
Refinancing a Parent PLUS loan into a private loan may lead to a loss of the superior benefits on federal loans.
- Death and Disability Discharges. A Parent PLUS loan is cancelled upon the death or total and permanent disability of the parent borrower or upon the death of the student on whose behalf the parent borrowed. Some private loans do not offer similar death and disability discharges.
- Economic Hardship Deferment and Forbearances. The obligation to repay a Parent PLUS loan can be suspended if the parent becomes unemployed. The Parent PLUS loan can also be deferred if the student goes back to college or to graduate school. Interest continues to accrue and will be added to the loan balance, increasing the size of the debt. Private loans may offer similar forbearances, but the forbearances may be limited to a maximum of a year in total duration. Private loans may require borrowers to pay the interest as it accrues during a forbearance, to prevent the loan from growing large. This is called a partial forbearance.
- Flexible Repayment Options. In addition to standard 10-year repayment, Parent PLUS loans offer extended and graduated repayment plans. If the Parent PLUS loan is included in a Federal Direct Consolidation loan, the consolidation loan may be eligible for income-contingent repayment.
- Loan Forgiveness. Parent PLUS loans that are included in a Federal Direct Consolidation loan may be repaid in the income-contingent repayment plan. These loans may qualify for public service loan forgiveness, if the parent works full-time in a qualifying job while making the loan payments.