Parent PLUS student loans sure seem like a financial death trap. Parents are encouraged to jump into them to help pay for school by taking out Parent PLUS student loans, and they think they are doing a good thing, but is it smart?
What a Parent PLUS Loan Is
For those that might now be aware, a Parent PLUS student loan is a loan parents can take out help dependent undergraduate student pay for education expenses. But some of those expenses might just really evaporate up in smoke if the child uses them for things like expensive off-campus housing, supplies, partying, and more loosely related university expenses.
Technically, parents can borrow up to the cost of attendance. The school will calculate this based on the living arrangements, tuition, meal plan, off campus rent, transportation, books, and fees. As you can see there is quite a bit of potential fluff builtin to the allowance.
When a Parent PLUS Loan is disbursed to the school, anything above the balance owed will be given to the parent to use as they see fit.
While the loan is approved and disbursed based on credit report information, no debt-to-income ratios or credit scoring applies.
But if you are reading this article, you already know all that stuff. What you really want to know now that you are on the hook for the Parent PLUS Loans is how you can manage if the payments are too damn high.
How to Lower Your Parent PLUS Loan Payments
Most of the advice you will hear from other people is how you can’t really do anything to lower your Parent PLUS Loan payments. On face value that would seem like true advice since most people don’t have a clue how to do it.
But reality is different than what people commonly say.
Besides just winning the lottery and paying off the loan, there are three ways to lower your Parent PLUS loan payments.
Graduated Repayment Plan – Yuck
A Parent PLUS Loan can be repaid using the Graduated Repayment Plan. Under that plan your payments will be lower at first but really ramp up towards the end of the ten year term. This type of repayment plan is for optimists who believe their financial situation will improve in the years ahead. Not a great strategy if money is already tight.
Extended Payment Plan – Better
Under this plan your monthly payments can be fixed or graduated for up to 25 years. It might seem like a good way to lower your payment but you’ll wind up paying significantly more in interest over the life of the loan. That is a long time to repay student loans with no chance of lowering the payment in addition to the plan payment.
The Best Way to Lower Your Parent PLUS Loan
But one of the best ways to lower and eliminate the loans is to use a Direct Consolidation Loan. This is very true if you meet the following requirements:
“Qualifying employment is any employment with a federal, state, or local government agency, entity, or organization or a not-for-profit organization that has been designated as tax-exempt by the Internal Revenue Service (IRS) under Section 501(c)(3) of the Internal Revenue Code (IRC). The type or nature of employment with the organization does not matter for PSLF purposes. Additionally, the type of services that these public service organizations provide does not matter for PSLF purposes.
A private not-for-profit employer that is not a tax-exempt organization under Section 501(c)(3) of the IRC may be a qualifying public service organization if it provides certain specified public services. These services include emergency management, military service, public safety, or law enforcement services; public health services; public education or public library services; school library and other school-based services; public interest law services; early childhood education; public service for individuals with disabilities and the elderly. The organization must not be a labor union or a partisan political organization.”
Using both a Direct Consolidation Loan and the Public Service Loan Forgiveness Program, you can not only lower your monthly loan payment but have whatever balance might remain, forgiven after ten years of payments.
When you consolidate your student loans in a Direct Consolidation Loan you can elect to repay the loan through the Income Contingent Repayment Plan. In that plan your monthly payment will be calculated each year based on your adjusted gross income, family size, and total amount of your Direct Loans.
So if you find yourself struggling right now to make the payments, this approach will lower your payment and if you qualify for the Public Service Loan Forgiveness Program then after just ten years of low payments, the balance will be forgiven. Keep in mind, as it stands now you might have to pay income taxes on the forgiven debt. Hopefully that will change in the future.
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Must one consolidate and still pay another 10 years before forgiveness eligible? I submitted paperwork while still employed for forgiveness based on working as a nurse for not-for-profits most of my career (40+years). Forced to retire at 68 yr due to health. Now on social security, and payments are automatically deducted for gov ED Parent Plus loans. Should I try to seek forgiveness again??
Parent PLUS loans do not qualify for PSLF unless they are in an ICR repayment. If you had personal direct loans that were not in an income-driven repayment plan there is a very limited opportunity to attempt to get those recognized.
The Department of Education says, “The Consolidated Appropriations Act, 2018 provided limited, additional conditions under which you may become eligible for loan forgiveness if some or all of the payments you made on your William D. Ford Federal Direct Loan (Direct Loan) Program loans were under a nonqualifying repayment plan for Public Service Loan Forgiveness (PSLF). The U.S. Department of Education (ED) is referring to this reconsideration as the Temporary Expanded Public Service Loan Forgiveness (TEPSLF) opportunity.
If you believe you qualify for the TEPSLF opportunity, it’s important to read the information on this page and send ED your TEPSLF request email as soon as possible. This opportunity is temporary, has limited funding, and must be provided on a first come, first served basis. Once all of the funds are used, the TEPSLF opportunity will end.”
More information can be found at https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service/temporary-expanded-public-service-loan-forgiveness
In general, for any Parent PLUS loan payment to count towards PSLF it must have been consolidated into a new Direct Loan and then repaid under the Income Contingent Repayment program.
My wife passed away last November she was on both of our children’s parent plus loans I sent the school and the Feds death certificates of my wife’s death. I’m not getting any correspondence and I noticed that the balances on both of our childerns accounts are still there. What should I do???
Were the loans in her name alone?
This is the list of loans that can be consolidated. https://studentaid.ed.gov/sa/repay-loans/consolidation
This is where you apply for a Direct Loan https://studentloans.gov/myDirectLoan/
You need to consolidate your Direct Parent Plus loans into a Direct Consolidation loan. The Direct Consolidation loan will pay off your Direct Parent Plus loans. Then you will be able to choose the Income Contingent Repayment program. Your monthly payment will be based on your annual income, family size and the total amount of the loan. Payment will be readjusted annually and will be set at 20% of your monthly discretionary income which is the difference between your adjusted gross income and 150% of the poverty line for your family size according to the state where you reside.
Thanks for pitching in. I just wanted to clarify one point, with the ICR it is 100% of the poverty level and not 150% like under the IBR.
Thanks for the correction Steve!
No problem. Keep the comments and help coming.
So glad I found your website. I took out Direct Parent PLUS loans for my son’s education and owe $199,000. I can’t afford the $2,200 + / monthly payments. I don’t know what kind of consolidation loan would be best to apply for from the US Department of Education. I am 57 years old and already spend 75% of my monthly income just to live. This does not include buying groceries or clothing, shoes, etc. etc. My first loan payment is coming due and I am in a panic. I owe about $5,500 in credit card debt. I have been a single parent since my son was 6 years old and I also house my brother who suffers from bi-polar disease and help fund our mother’s care and her expenses (she is now in a nursing home but had lived with me for years).
How do I decide which consolidation loan to take out?
Thank you.
See the above article.
Hi Steve, thanks for the informative article. I just wanted to add that Parent Plus loans are eligible for Income Contingent Repayment if they were originated after 2006. They have to go through Direct Consolidation to be eligible for it though. Since many P.P. borrowers are close to or in retirement, this can make a big difference since the payment plan is calculated based on taxable income only. This might help people afford their payments more easily and is an eligible payment plan for PSLF too.