According to the latest numbers from the Department of Education, 3.5 million families are now paying back $83.7 billion in federal parent PLUS loans taken out to help pay for their children’s degrees, an increase of more than $21 billion in less than four years.
As New America policy analyst Kim Dancy has noted, parent PLUS loans play a “unique role in federal student aid: these are the only loans made directly to the parents of students, and because their terms are less generous than other student loans, they’re usually taken out only after other federal resources have been exhausted. The loans are virtually unlimited, yet they are made without regard to a parent’s ability to repay.”
Interest rates on parent PLUS loans are higher than any other federal student loan — 7 percent as of July 1, 2017 — and they’ve been even higher in the not-so-distant past (above 8 percent from 2006 to 2010). Because PLUS loans are made without evaluating the borrower’s ability to repay, it’s easy for parents to get in over their heads. Now many are finding themselves approaching retirement with frightening levels of student loan debt.
Retiring with $353K in parent PLUS loans
Richard Gaudreau, a lawyer who has litigated student loan issues in federal bankruptcy and appeals courts, writes in a Huffington Post column that he has a client who is trying to repay $353,000 in PLUS loans at 7.3 percent interest as he nears retirement.
The only options his client was originally given by his loan servicer was to pay $2,493 per month for 30 years ($897,321 total), or to enroll in a graduated repayment plan starting at $2,212 per month, climbing to $3,164 a month over 30 years ($958,171 in total payments).
Gaudreau says that the loan servicer his client talked to “did not seem concerned whether these were viable options.” Fortunately, the client discovered he had another choice — rolling all of his PLUS loans into a federal direct consolidation loan, and signing up for a federal income-contingent repayment plan, with payments of $750 a month.
The U.S. Government Accountability Office has estimated that more than 700,000 households headed by a person at or near retirement age had some student debt, and 36,000 individuals 65 and older were seeing their Social Security benefits garnished to pay off that debt.
Refinancing parent PLUS loans
Fortunately, some parents are discovering that they are eligible to refinance parent PLUS loans at lower interest rates, potentially saving thousands of dollars, as NBC Nightly News reports.
As explained in the NBC News piece, Credible is a marketplace where borrowers can see the actual rates they’d qualify for if they refinanced with a private lender. Colleen used the Credible marketplace to find a lender that refinanced her federal student loan debt at 4.5 percent interest, which she estimates will save her $12,000 over the life of her new loan.
Students can also use Credible to take out private student loans co-signed by their parents at rates that can be competitive with PLUS loans. Although parents may still be on the hook if their children have trouble paying, it’s clear when the loans are taken out that the children are the ones who are expected to repay them.
Refinancing is not for everybody — borrowers who refinance federal loans with a private lender lose access to benefits like income-driven repayment programs and the ability to qualify for loan forgiveness after 10, 20, or 25 years of payments.
But PLUS loans taken out by parents aren’t eligible for the most attractive income-driven repayment programs, like PAYE, REPAYE and IBR. The only income-driven program they qualify for after federal loan consolidation is income-contingent repayment, or ICR.
When borrowers roll up PLUS loans into a federal direct consolidation loan they don’t get an interest rate reduction. The interest rate is the weighted average of all the borrower’s existing loans, rounded up to the nearest one-eighth of a percent.
But as many borrowers have discovered, it’s possible to lower the interest rates on federal student loans by refinancing them with a private lender.
Credible is a multi-lender marketplace that allows borrowers to get personalized rates and compare loans from vetted lenders, without affecting their credit scores.