You helped your student get through college by taking out a Federal Direct Parent PLUS Loan. These loans, which are your responsibility to repay, enter repayment 60 days after full disbursement or 6 months after your student graduates or drops below half-time enrollment. There are several options for repaying Parent PLUS Loans.
Standard repayment involves level amortization for a 10-year repayment term. This means that that monthly payments are the same for all 10 years.
Standard repayment is the repayment plan with the highest monthly payment. But, it also involves the lowest total payments over the life of the loan, saving you money.
You will also be done repaying your Parent PLUS loans in 10 years. Generally, you should aim to have all debts paid off by the time you retire. If your total Parent PLUS loans for all your children are less than your annual income, you should be able to afford to repay the loans in 10 years or less.
Other repayment plans offer a lower monthly payment, but your loans will be in repayment longer and at higher total cost. It is best to choose the repayment plan with the highest monthly payment you can afford.
Under the graduated repayment plan, your monthly payments start off lower, barely above interest-only payments, and will increase every two years. No payment will be more than three times any other payment.
The repayment term under graduated repayment depends on the loan balance and whether the loans are consolidated or not. The repayment terms include 10 years, 12 years, 15 years, 20 years, 25 years and 30 years, similar to the repayment terms for extended repayment.
Extended repayment, like standard repayment, involves level amortization, but with a longer repayment term. There are two types of extended repayment.
If the borrower has consolidated their federal loans, the repayment term depends on the loan balance according to this table.
Less than $7,500
$7,500 to $9,999
$10,000 to $19,999
$20,000 to $39,999
$40,000 to $59,999
$60,000 or more
If the borrower has not consolidated their federal loans, they are eligible for a 25-year repayment term if the total loan balance is $30,000 or more.
The monthly loan payments will be lower under extended repayment than under standard repayment, but the total interest paid will be greater.
Income Contingent Repayment
To obtain income-contingent repayment (ICR) on a Parent PLUS loan, the Parent PLUS loan must be included in a Federal Direct Consolidation Loan and the Parent PLUS loan must have entered repayment on or after July 1, 2006. The Parent PLUS loan is not otherwise eligible for an income-driven repayment plan.
Income-contingent repayment bases the monthly payment on your income, not the amount you owe. The monthly payment is set at 20% of your discretionary income, which is defined as the amount by which your income exceeds 100% of the poverty line.
After 25 years of payments under income-contingent repayment, the remaining balance will be forgiven. This forgiveness is treated as taxable income to the borrower under current law.
Public Student Loan Forgiveness
Public Service Loan Forgiveness (PSLF) is available to borrowers who work full-time in a qualifying public service job while repaying their loans for 120 payments (10 years) in the Direct Loan program in an income-driven repayment plan or standard 10-year repayment. Qualifying public service jobs include working for city, county, state or federal government or working for a 501(c)(3) tax-exempt charitable organization.
Since income-contingent repayment is the only income-driven repayment plan available for Parent PLUS loans, parent borrowers must consolidate their Parent PLUS loans into a Federal Direct Consolidation Loan first to qualify for public service loan forgiveness. Repaying the loans under standard repayment would yield no forgiveness, as the loans would be paid off in full after 10 years under standard repayment.
Public service loan forgiveness reduces the forgiveness period from 25 years to 10 years. Public service loan forgiveness is tax-free.
Refinancing your Loan
Another option is to refinance your Parent PLUS loans into a private student loan or private parent loan, or a non-education loan. You might qualify for a lower interest rate if you have excellent credit. However, you will lose the federal repayment options and other benefits of federal education loans, since the loan will no longer be a Parent PLUS loan after you refinance it.
While this may be a good option for some borrowers, it will not necessarily save you money.
Transferring the Loan
Your child can refinance the loan in his or her name through a private lender. This will then transfer responsibility for repaying the loan to them. To qualify for a private refinance, however, they must have a strong credit score, enough income to make the appropriate payments and have a history of making on time loan payments.
Parent PLUS loans are eligible for deferments and forbearances for up to three years, the same as other federal education loans. Parent PLUS loans are also eligible for a deferment if the student on whose behalf the parent borrowed returns to college on at least a half-time basis.
Interest continues to accrue during a deferment or forbearance. If the interest isn’t paid as it accrues, it will be capitalized, adding it to the loan balance. This increases the amount of debt, making it more difficult to repay.
It is best to avoid deferments and forbearances unless the parent is unable to repay the debt due to a short-term financial difficulty, such as unemployment or medical/maternity leave. For longer-term financial difficulty, the parent should choose a repayment plan that involves low monthly payments instead of a complete suspension of the repayment obligation.
Deferment will give you time to get your finances in order. You are not required to make payments during this time, however, the loan will still be accruing interest.
Stay the Course
You may have been happy to fund your child’s education but paying off a Parent PLUS Loan can be burdensome and take time. You will be repaying the debt for 10-25 years regardless of the option you select. Choose a repayment option that works for you and your family and stay the course.
Parent PLUS loans do not have prepayment penalties, You can pay off the loans sooner than 10 years by making extra payments on the debt. Bring in a new source of income or cut items from your budget to get rid of the loan even faster.