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Dealing With My Parent PLUS Loans is So Confusing and I Don’t Know What to Do

By on August 28, 2017

Question:

Dear Steve,

The Parent Plus loans for my daughter’s undergraduate education will be coming out of deferment soon, and my husband and I already know it’s going to impossible for us to make the payments in any way but the ICR plan, which means of course, we would have to apply for a Direct Consolidation loan. It’s very difficult for me to ask just one question, since our situation would really require answering multiple questions that all sort of revolve around each other. We also have Parent Plus loans for our son, which might come out of deferment in June 2018, but might not for another 2.5 years, depending on whether or not he goes to Graduate School, AND I have Parent Plus loans for his Undergraduate education, as well. We also have loans, taken in my husband’s name, only for my son’s education. So as you can see it gets quite complicated. I will attempt to ask them one at a time, and build one on the other.

We promised our children we would cover the cost of their undergraduate education. After all, it’s not their faults we didn’t plan and save for them to go. So we’ll also be making payments on the Direct Loans in THEIR names.

I’m confident that, for a little while at least, the payment on the loans in my daughter’s name will be very small. I’m pretty sure she is already planning to apply for Income “Based” Repayment plan and her income right now is under $15,000.00. So I’m not too concerned about handling those payments. It’s the Parent Plus Loans I’m most concerned about.

The pressing questions are: Since I have Parent Plus loans for both our son, and daughter, with only the ones for our daughter coming out of deferment in November; can I get a Direct Consolidation loan for just the ones in my daughter’s name for now, and another one in the future for the ones in my son’s name? AND Since the loans were applied for and granted in just my name, when calculating my discretionary income to move to the income contingent repayment plan, would my husband’s income have to be considered alone with mine?

Answer:

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I think I can give you some peace of mind here.

You can drop the current Parent PLUS loan into a Direct Consolidation Loan. There is no cost to do that. You would then elect to repay the loan through the Income Contingent Repayment (ICR) program.

Your ICR payment is “The lesser of 20 percent of your discretionary income or what you
would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income.”

Now the term discretionary income trips up a lot of people. It’s not the amount of income you want to have left over. The definition of Discretionary Income is actually, “For Income-Contingent Repayment, discretionary income is the difference between your income and 100 percent of the poverty guideline for your family size and state of residence. The poverty guidelines are maintained by the U.S. Department of Health and Human Services and are available at aspe.hhs.gov/poverty-guidelines.

Now with the ICR program you may want to think of filing a separate but married tax return starting on your next filing. With the ICR the monthly payment is “based on the combined income and loan debt of you and your spouse only if you file a joint federal income tax return, or if you and your spouse choose to jointly repay under the plan. Only your income is considered if you file a separate return from your spouse and do not choose the joint repayment option.” – Source

In the ICR program you will need to recertify your payment each year and after 25 years of payment the balance may be forgiven.

However, what you might want to do if you elect to file married but separate next year is to then wrap the other Parent PLUS loan into a new Direct Consolidation Loan with the one you are going to do now. Reason being that when you reconsolidate you will lose any credit for months paid towards the 25 year forgiveness. payments will be credited, time will be lost. So the earlier you get both Parent PLUS loans into one Direct Consolidation Loan and repaying on just your income, the better it will be overall.

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One issue you need to keep absolutely straight in your mind is the Parent PLUS Loans and resulting consolidation are your personal responsibility and any loans in the kids names are their personal responsibility. Just because you elect to help with any payment on your child’s loan, it does not absolve them of any legal or financial responsibility for those loans. Don’t let them get complacent about the loans even if you are making the payment because important notices will come to them.

The Income Driven Repayment programs can feel like a real blessing for someone like your daughter but keep in mind there is a big trap in them if her salary continues to climb and she no longer qualifies for the reduced payment. See Why Income Based Student Loan Payments Can Be a Terrible Trap.

I think this covers most of your concerns. I’m always here to help if more crops up.

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About Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

4 Comments

  1. DCL63

    August 29, 2017 at 8:20 pm

    Thanks so much for answering so quickly. I can’t express how much I appreciate it. I’ve been studying, and stressing about this for years now.

    Now, what just occurred to me this morning, as I was trying to explain to my husband what I’d learned from you; is that I could tentatively go ahead and apply for a Direct Consolidation for ALL the parent plus loans in my name, the ones for my daughter, and my son, even though his will not be out of deferment until almost a year from now. Considering the calculation of the ICR payment for my loans would be based on discretionary income and the poverty guidelines, the amount I’m consolidating won’t affect the payment. Is that correct? If this is the case it makes the next part of my question(s) not nearly as complicated, as I was making it before this lightbulb came on.

    I currently work for our local municipality, and will actually be eligible to retire with full benefits in 7 years. However, if I am understanding the PSLF correctly, and as long as my health holds up; it will certainly be worth it to work an additional 3 to 3.5 years, and make the 120 payments required to be eligible to apply for PSLF. Is this right? If I were to begin payments January 2018, I could apply for PSLF and perhaps these Parent Plus loans could be forgiven by January 2028, right?

    • Steve Rhode

      August 30, 2017 at 11:54 am

      You are correct on all counts. But there are a couple of critical points.

      1. Talk to your tax professional and understand what the tax cost is to you changing your filing to married but separate. You’ll want to do the math on if the payment reduction by doing that is cost effective given a potential overall tax owed increase.

      2. Keep in mind the PSLF program right now is an utter mess. But I feel confident it will eventually get on an even keel. See https://getoutofdebt.org/103246/public-service-loan-forgiveness-program-student-loans-turns-nasty-toxic-vile

      The most important fact learned recently is the Department of Education will not forgive loans under PSLF until all the payments have been made, a forgiveness application has been filed and it is approved while you are still working in the qualifying position. Who knows how long it will take them to approve it? But getting in the program now and working towards that would be smart because the current Trump administration is talking of cutting the program in the near future. See https://getoutofdebt.org/101643/public-service-loan-forgiveness-eliminated-trump-2018-budget

  2. DCL63

    August 28, 2017 at 2:18 pm

    Question asked about Parent PLUS Loans.

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