Parents are increasingly facing a student loan debt burden of their own, as they borrow parent loans to help their children pay for college. These parents want to know if their parent loans are eligible for student loan forgiveness and, if so, how to qualify for loan forgiveness on their parent loans.
As a parent, you want what’s best for your child, and that often includes an excellent education. But, with college costs increasing every year, helping your child pay for school may mean taking out Parent PLUS Loans to cover the cost.
While taking out a parent loan can be a great gift for your children, you will also be stuck repaying the loan for years or even decades, maybe long into retirement. Are there any options for financial relief, such as loan forgiveness?
What are Parent PLUS Loans?
Parent PLUS Loans are federal education loans borrowed by parents of dependent undergraduate students who are enrolled at least half-time at an eligible college or university. Parent PLUS Loans allow you to borrow as much as you need — up to the total cost of attendance — in your name.
Parent PLUS Loans have the highest interest rates of any federal loan, 2.55 percentage points higher than the Federal Direct Stafford Loan for undergraduate students. The higher interest rate makes repaying these loans more expensive.
According to the U.S. Department of Education, over 3.5 million Parent PLUS loan borrowers still have outstanding Parent PLUS loans as of the end of 2017.
Parent PLUS Loan Forgiveness
Parent PLUS Loans are eligible for only two types of loan forgiveness: income-contingent repayment forgiveness and Public Service Loan Forgiveness.
Income-Contingent Repayment Forgiveness
If you’re struggling to keep up with your student loan payments, an income-driven repayment (IDR) plan can provide financial relief. Under an income-driven repayment plan, your monthly payment is capped at a percentage of your discretionary income, dramatically lowering your bill.
However, Parent PLUS Loans don’t qualify for any of the income-driven repayment plans directly. But, there is a loophole.
A Federal Direct Consolidation Loan that refinances a Parent PLUS loan is eligible for income-contingent repayment (ICR). The Parent PLUS loan must have entered repayment on or after July 1, 2006. The income-contingent repayment plan caps your payment at 20% of your discretionary income, which is the amount by which your income exceeds 100% of the poverty line.
Income-contingent repayment also extends the repayment term to 25 years. After 25 years worth of payments, the remaining balance is forgiven, freeing you from your student loan.
Relying on income contingent repayment loan forgiveness means you have to make payments for 25 years, but you’ll have lower monthly payments and can depend on your loans disappearing at the end.
However, you should know that the forgiven balance is considered taxable income under current law, so you may owe some money at tax time.
Public Service Loan Forgiveness (PSLF)
Another option to consider is Public Service Loan Forgiveness. With this forgiveness program, your loans are forgiven after just 10 years, rather than 25.
If you work for the government or a tax-exempt, non-profit organization, you may be eligible for public service loan forgiveness. To qualify, you must work full-time in a qualifying public service job, your loans must be in the Direct Loan program and you must make 120 qualifying payments. Qualifying payments include payments made under any of the income-driven repayment plans, as well as standard 10-year repayment.
To get forgiveness, you’ll need to sign up for an income-driven repayment plan. Otherwise, you’ll have no balance remaining at the end to be forgiven. The only way to get an income-driven repayment plan is to include your Parent PLUS Loan in a Federal Direct Consolidation Loan. Then, sign up for an income-contingent repayment plan.
Once approved, you’ll only have to make 10 years worth of payments to qualify for forgiveness. Unlike Income-Contingent Repayment Forgiveness, the amount forgiven through Public Service Loan Forgiveness is tax-free, saving you even more money.
Managing Your Loans
When it comes to managing your Parent PLUS Loans, loan forgiveness is possible. However, your opportunities for forgiveness are limited, and it can take 10-25 years to qualify for forgiveness. But, by signing up for an income-contingent repayment plan and making your monthly payments and submitting the required annual paperwork on time, you can successfully repay your loans and get some financial relief.
If you have private student loans, consider refinancing to lower your interest rate and save money. Keep in mind refinancing federal student loans means a loss in many benefits – income-driven repayment plans, any federal forgiveness programs, generous deferment options, and more.