Parent PLUS loans are a type of education loan offered by the federal government. Unlike other federal student loans, these are only available to parents of undergrad students. The parent who takes out the loan assumes complete responsibility for the payments.
Parents may choose to refinance their parent PLUS loans for a variety of reasons. While refinancing has a lot of benefits, it also has a few downsides. Understanding the pros and cons of refinancing parent PLUS loans can help you decide whether or not this option is right for you.
First, let’s go over the benefits of refinancing these Parent PLUS loans.
Parent PLUS loans have a high-interest rate. When you refinance, lenders will offer you a new rate based on your credit score and income. If you have good credit and a stable income, you’ll qualify for a much lower interest rate than you’re paying now. The lower interest rate will result in substantial savings over the term of the loan. Refinancing is the best solution for anyone looking to lower the interest on their Parent PLUS loan.
The federal government doesn’t allow loan transfers, which means you’re stuck with the loan till it is fully paid up. Refinancing through a private lender is the best way to transfer the loan to your student. The only condition is that your child must meet the lender’s requirements to qualify for refinancing.
There are several reasons why you may want to transfer a Parent PLUS loan to your child. For one thing, it helps them with building their own credit score. This can be very useful when they are just getting started on their own financial journey.
Secondly, transferring the loan frees up your own resources that can be used for other purposes. Maybe you need to take a mortgage or vehicle loan, or even another Parent PLUS loan for your other child. Whatever the reason, your existing loan will limit the amount you can borrow.
If you can’t afford the monthly payments, you may be at risk of missing payments, which has several long term consequences. If income-based repayment plans don’t resolve your problem, the other solution is to refinance your Parent PLUS loans. When you refinance, you can choose a new repayment term. Opting for a longer loan term will instantly lower your monthly payments making them more affordable. While this will add to the cost of your loan over the loan term, it will help you avoid the more immediate threat of delinquency or default.
If you took out multiple loans for your student’s education, you’d have to keep track of multiple payment amounts and due dates. This itself can cause you to miss payments. When you refinance, you can consolidate multiple parent student loans into a single loan. You can even combine your Parent PLUS loans and private parent student loans into a single loan. This will make your loans easier to manage and reduce the likelihood of missing payments due to oversight.
Of course, there are a few drawbacks to consider as well.
Parent PLUS loans come with several federal protections such as repayment programs, deferment and forbearance options, and loan forgiveness.
The flexible federal repayment programs can be very useful if you can’t afford the payments under the standard 10-year repayment plan.
The deferment and forbearance options allow you to pause payments if you’re experiencing any financially hardship.
Under the Public Service Loan Forgiveness program, you could get your loans forgiven if you work in qualifying careers.
When you refinance federal student loans, they get converted to private student loans. Private student loans aren’t eligible for any of the benefits associated with the original loan. Very few lenders offer flexible payments, deferment or forbearance options. Even when they do, it will be for a shorter period and the terms will be far more rigid. No private lenders offer any type of forgiveness program.
While refinancing has several pros, this may not be the right choice for everyone. Whether or not you should refinance your Parent PLUS loans will depend on a few different factors.
Refinancing Parent PLUS loans is advisable if you:
Refinancing Parent PLUS loans is NOT advisable if:
Once you’ve decided that refinancing is right for you, don’t rush into getting the process over and done with. There are still a couple of things to consider.
The first thing to consider is the prevailing market rates. Interest rates on private loans are influenced by market rates. Ideally, you should refinance when rates are low. Even a small drop in the rate can result in significant savings. If you’ve decided to refinance, keep an eye on the rates so you can benefit when markets are down.
When you’re transferring the loan to your child, your child’s financials will determine the interest on the refinanced loan. If your child’s credit score or income is not good enough to qualify for a lower rate, you may want to wait a bit. Timing is everything if you’re looking to save money when refinancing Parent PLUS loans.
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