Parents may wish to refinance their Federal Parent PLUS Loans to get a lower loan payment, to qualify for a lower interest rate, to obtain a shorter or longer repayment term, to change their lender or servicer, to get access to other repayment options, and to transfer the loan to a child.
Parent PLUS Loans can be refinanced through a federal direct consolidation loan or a private student loan refinance. Parents should consider a few caveats before refinancing a Parent PLUS Loan.
What is a Parent PLUS Loan?
A Parent PLUS loan is a federal education loan made to parents of undergraduate students.
Unlike federal student loans, which have fixed annual and aggregate loan limits, the Parent PLUS Loan has annual loan limit up to the full cost of attendance minus other aid and no aggregate loan limit.
The Parent PLUS loan is more expensive than federal student loans, with higher interest rates and higher loan fees.
Most parents use the Parent PLUS Loan to provide supplemental education financing after the student reaches the loan limits on their federal student loans.
Federal Consolidation Loans
A consolidation loan merges two or more federal education loans into a single loan. You can also consolidate a single federal education loan, although this is less common.
A consolidation loan is not a true refinance, as the interest rate is based on the current interest rates on the loans included in the consolidation loan. The interest rate on a consolidation loan is not based on the creditworthiness of the borrower.
For a true refinance of a Parent PLUS loan, the borrower must use a private lender. But, a federal consolidation loan retains the superior repayment benefits of a federal education loan, which are lost when refinancing with a private lender.
Parents sometimes consolidate Parent PLUS loans to switch loan servicers, to streamline repayment by having a single loan instead of multiple loans or to change the repayment terms on the loan.
Consolidating a Parent PLUS loan can also help the parent obtain an income-driven repayment plan and qualify for public service loan forgiveness. Parent PLUS loans, on their own, are not eligible for income-driven repayment plans. But, if a Parent PLUS loan is included in a Federal Direct Consolidation Loan, the consolidation loan is eligible for income-contingent repayment (ICR). ICR bases the monthly payment on 20% of discretionary income, where discretionary income is the amount by which adjusted gross income (AGI) exceeds 100% of the poverty line, with the remaining debt forgiven after 300 payments (25 years).
Follow these steps to consolidate your Parent PLUS loans:
- Visit StudentAid.gov.
- Click on the In Repayment tab and select Complete Consolidation Loan Application and Promissory Note.
- Login using your FSA ID.
- Select the loans to include in the consolidation loan and add additional loans if necessary.
- If you will be applying for Public Service Loan Forgiveness, answer “Yes” to the first question in the Servicer Selection section.
- Choose a servicer using the Federal Loan Servicers drop down menu. You can choose to keep your current servicer or switch to a different servicer and click on the Continue button.
- Select a repayment plan and click on the Continue button.
- Read the set of disclosures, check the box that follows and click on the Continue button.
- Complete the Borrower Information and Reference sections. Some of the questions will be prefilled based on the information associated with your FSA ID. Make any necessary changes. Click on the Continue button.
- Review the information on the summary page and edit it if necessary. Then, check the box, fill in your name and click on the Continue button.
- You’re done! You should receive a confirmation email message.
Refinancing with a Private Student Loan
A private consolidation loan, sometimes called a private refinance, is a private student loan used to refinance federal and private education loans.
Carefully consider whether you should refinance a Parent PLUS loan into a private consolidation loan. There are pros and cons of refinancing student loans. You will lose certain benefits if you refinance a federal loan into a private loan.
Some of the key considerations include:
- Federal Parent PLUS loans generally have lower fixed interest rates than private student loans. However, if you have very good credit, you might be able to qualify for a lower fixed interest rate on a private student loan.
- Some private student loan lenders offer variable interest rates that are initially lower than the interest rates on federal loans, providing you with an opportunity to save money if you expect to pay off the private loan before interest rates rise too much.
- Private student loans do not offer income-driven repayment plans.
- Federal Parent PLUS loans offer more flexible repayment options, such as extended and graduated repayment. Some private student loans may not allow the borrower to change repayment terms.
- Federal Parent PLUS loans offer longer deferments and forbearances than private student loans, such as the economic hardship deferment.
- Private student loans do not offer loan forgiveness programs such as teacher loan forgiveness or public service loan forgiveness.
- Federal Parent PLUS loans offer other opportunities for loan cancellation, such as the death and disability discharges, and closed school discharges. Only about half of private student loans offer a death and disability discharge.
Follow these steps to refinance your Parent PLUS loans:
- Review your credit reports at annualcreditreport.com and fix any errors.
- Identify all of the Parent PLUS loans (and other federal and private education loans) that you want to refinance. Make a list that includes the type of loan, the name of the lender, the loan ID number and the current loan balance.
- Calculate the total amount you will refinance by summing the current loan balances. Some lenders have limits on the amount of education loan debt that they will refinance.
- Shop around for the best interest rates and repayment terms. Check several of the most popular lenders that refinance student loans.
- Pick a lender.
- Apply for a refinance with this lender. It usually takes less than half an hour.
Risks of Refinancing a Parent PLUS Loan
There are several risks associated with refinancing a federal loan into a federal consolidation loan or private refinance:
- A refinance or consolidation loan replaces multiple loans with a single loan. This will prevent you from targeting the highest-rate loan for quicker repayment, which can sometimes save you more money than a refinance.
- Private student loans do not have the same terms and conditions as federal education loans. Consider the benefits that you will lose if you refinance a Federal Parent PLUS loan into a private education loan.
- A refinance or consolidation loan is a permanent change that cannot be reversed. There’s no going back. So, be sure that this is what you want to do.
Refinancing a student loan could possibly lower your interest, saving you money. However, you should consider the pros and cons of student loan refinance before you decide.
For example, refinancing federal loans into a private loan means a loss of all of the federal loan benefits, such as:
- Income-driven repayment options
- Potential for loan forgiveness
- Possible widespread loan forgiveness
- Generous deferment period if you lose your job or have an economic hardship
- Possibly loans that are subsidized
- Potential widespread forgiveness.
If you have decided that student loan refinance is right for you, check out our list of the best lenders to refinance student loans.
Credible allows you to compare rates from 10 lenders without impacting your credit for free. Splash Financial is a student loan refinance marketplace that matches you with a lender with a low interest rate.
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