Borrowing federal Parent PLUS Loans on your child’s behalf can support them toward the education they want without the burden of a high amount of private student loans. Although it’s a life-changing gesture, it unfortunately comes at a cost for many parents.
The costs of borrowing Parent PLUS Loans have increased significantly over the past 20 years. Across multiple loans toward your child’s undergraduate career at uncomfortably high interest rates, you might have accumulated a balance higher than you had imagined.
If you’re a Parent PLUS borrower and having trouble repaying your debt or worry that they’ll interfere with your retirement goals, then I’ve got your back with seven strategies and tips for Parent PLUS borrowers.
1. Traditional repayment plans: Basic and not the best
Parent PLUS Loans have the option of three types of traditional amortized repayment plans:
- Standard 10-year repayment plan. The loan is repaid to $0 over 10 years with level payments.
- Extended repayment plan. Generally, this is a 25-year repayment plan and can be of equal monthly payments or graduated payments that start lower and get higher.
- Graduated repayment plan. The repayment length is based on your loan balance. The payments start off lower and increase over the repayment period.
Just like any other loan you’d think of, this means that you pay the full balance of principal and interest to zero over a stated time through monthly payments. You borrow money, and the lender tells you how much you owe and for how long. There’s not a whole ton of strategy here, but the differences among each plan’s monthly payment can be significant in terms of affordability.
To qualify for the traditional repayment plans, you don’t need to do anything. To have any further federal repayment plan options, such as the Income-Contingent Repayment (ICR) Plan, or potentially other more favorable income-driven repayment (IDR) plans, you’d need to consider a Direct Loan Consolidation application.
Without consolidating your loans, these traditional repayment plans are your only options.
2. Consolidating and the ICR Plan
Direct Loan Consolidation can simplify your repayment and help you access other repayment and forgiveness options. If you do this the straightforward way, you get one more option, so stay tuned for the others, too.
Income-Contingent Repayment is the only IDR plan accessible to Parent PLUS borrowers who’ve consolidated using a federal Direct Consolidation loan. The ICR Plan is the oldest IDR plan and has been in place since July 1, 1994 – it is also generally the worst IDR plan.
ICR involves a monthly payment based on the borrower’s (and spouse’s if married and filing jointly) Adjusted Gross Income (AGI) minus the HHS Poverty Guideline deduction for family size, which equals discretionary income for ICR.
The plan requires a monthly payment based on the lesser of:
- 20% of discretionary income, divided by 12; and
- Your standard 12-year payment, multiplied by an annually updated factor based on your income and tax filing status.
In other words, the payment can be quite high unless your income is low relative to your loan balance. All IDR plans lead to forgiveness of the remaining balance after 20 or 25 years, ICR is a 25-year repayment plan prior to reaching forgiveness.
Calculate Your Parent PLUS Loan Payments and Forgiveness PathParent PLUS Loan Calculator
If you’ve already consolidated some or all of your Parent PLUS Loans into a Direct Consolidation Loan, ICR is the only IDR plan you qualify for. If you have multiple loans and fall under the legal loophole we refer to as the Double Parent PLUS Consolidation tactic, then you might have more ways to minimize your payments and total cost, while improving your financial health toward your retirement years.
Important: The double consolidation loophole is being eliminated in 2025. To take advantage of it, you must take action sooner rather than later.
3. Double Parent PLUS Consolidation and the better IDR plans
So, ICR isn’t all that great in many instances and is generally the worst IDR plan. What else can you do? Based on loan servicer and general Department of Education guidance, seemingly nothing.
Fear not! Here's what we've found true.
Even if you had Parent PLUS Loans, as long as you end up with a Direct Consolidation Loan that has not directly received a Parent PLUS Loan, you might be able to use the other more attractive IDR plans. We call this the Double Parent PLUS Consolidation strategy.
Diving into the acronym soup of IDR plans, Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE), and Income-Based Repayment (IBR) can all be much more favorable options than ICR; usually requiring less than one-half of ICR’s monthly payment.
Given the Biden Administration’s proposed changes to the REPAYE plan, this is even more exciting as payments will be at their lowest, and with a 100% unpaid interest subsidy.
Consider a borrower with a $200,000 Parent PLUS Loan balance at a 7% rate. They have a family size of two and earn $70,000, while their spouse earns $1300,000 annually.
On ICR, if the borrower files taxes separately rather than jointly (consult tax pro for tax advice), the monthly payment would be approximately $862 per month. Under the same circumstances, PAYE would be $410 per month, and the proposed new version of REPAYE would be $310 monthly with an unpaid interest subsidy of over $10,000.
Let’s say the borrower with $70,000 income retires, and the AGI on their tax return is now $32,500. In PAYE, their monthly payment becomes $90 monthly, and in the proposed new version of REPAYE, their required payment would be $0, with all of the interest being subsidized.
For this family, the standard 25-year payment would otherwise be approx. $1,450 per month.
If you’re a non-profit or government employee who qualifies for Public Service Loan Forgiveness, you’ll be further enthused to have better IDR plans! If you want help understanding and executing the strategy, book a personalized one-on-one session with our team.
4. Public Service Loan Forgiveness
If the borrowing parent has employment that qualifies for the Public Service Loan Forgiveness (PSLF) program, then the reality of IDR plans is far sweeter.
Rather than reaching forgiveness over a 20- or 25-year period and the forgiven balance generally being treated as taxable income, PSLF is generally tax-free and over a 10-year or 120 qualifying-repayment period.
Consider a public school principal with triplets. The principal’s AGI is $95,000 annually, and is 16 years from full pension credit and before considering retiring. Their spouse’s AGI is $150,000.
All three kids have applied and been accepted to their dream school, where the annual cost for each child is $60,000. The parents have little to no accumulated education-related savings, so they have to decide between Parent PLUS Loans and private loans for the total assumed $720,000 needed.
Assuming a $720,000 loan balance with an interest rate of 7%. The standard 10-year payment would be $8,360 monthly.
If all three kids paid these off after school by refinancing to a 15-year payment at a 5% interest rate, they’d pay a total of over $1,000,000, and each would have a monthly payment of approximately $1,900 per month.
Conversely, let’s say the parents filed taxes separately rather than jointly, such that only the principal’s income is used, implemented the Double Parent PLUS Consolidation tactic effectively, and entered the proposed version of REPAYE.
The monthly payments would be about $520 monthly, and after 10 years of making payments, they might only pay a total of $72,000 before reaching tax-free forgiveness on the remaining balance under PSLF.
In this instance, PSLF and the Double Parent PLUS Consolidation tactic would save the family over $930,000 and make the kid’s dream schools wildly affordable, rather than financially crippling.
5. Private refinancing into the parent’s name
Maybe your income is too high for IDR plans to make sense, even considering the Double Parent PLUS Consolidation tactic.
The interest rates on Parent PLUS Loans are generally in the 6.5% to 7.5% range, depending on the year(s) you borrow. The higher the interest rates of a loan, the higher your payment is. You’ll also pay more total interest if paying a loan in full, and not pursuing forgiveness.
Parents can generally refinance the loan to just include their name. Parent PLUS Loans are already the parent borrower’s legal responsibility, anyway.
With a $100,000 Parent Plus loan balance at a rate of 7.5%, the monthly payment is $1,187 for a 10-year standard plan.
A private refinance to a 10-year payment at a 4.5% interest rate results in a monthly payment of $1,036. A 15-year, assuming a 4.7% interest rate, is $775 monthly.
Over the life of the loan, the 10-year refinance would save about $18,000 compared to the standard 10-year plan; a 15-year refinance would save about $2,900.
Always confirm current market rates to see if private refinancing rates are actually attractive, even relative to Parent Loans. Always consider the potential benefits of the federal student loan system before refinancing, since there’s no going back.
6. Private refinancing into your child’s name
Certain private lenders allow you to remove the parent borrower from the new agreement, and exclusively put the loan under your child’s name once they’ve graduated. They will also need to meet the lender’s income and credit requirements to qualify.
This might be a good option if the student borrower is financially successful, as are the parents — such that the IDR strategy doesn’t apply — and that the child would like to assume financial responsibility for the loan.
I’ve seen this make sense when the student always wanted authority over the loan, but it was just safer to borrow federally initially, rather than with a private lender. If this is a fit for you, learn how to transfer parent student loans to your child.
7. Consider strategic deferment or forbearance
Let’s say that your income, along with your spouse’s income, are too high to make payments under any IDR plan unattractive, based on your other financial goals.
Rather than high payments slowing down your retirement savings and timeline, if you’re a few years from retirement and experiencing financial hardship, you could apply for strategic deferment or forbearance.
This approach makes it so that you don’t owe payments while you are working. When retired, if your AGI is low, or is largely from Social Security benefits, you’d have a very low — if any — monthly payment under an IDR plan. Especially after Double Parent PLUS Consolidation.
Parent PLUS Loans: There’s no one-size, fits all plan
No one strategy is the best for everyone. From my experience, those who can apply the Double Parent PLUS Consolidation strategy and/or PSLF see the greatest savings potential and life-changing impact.
Although our team at SLP is always happy to see the Double Parent PLUS Consolidation strategy work for families, we’re even more excited now than ever. With the legislation updates to PSLF, IDR Waiver and One-Time Account Adjustment, in addition to IDR plan changes, it’s never been a more impactful time for borrowers to make the right decisions for themselves.
Before you work yourself into your grave because of Parent PLUS Loans, book a consultation — we’ll help you like we’ve helped hundreds of parents find clarity and confidence in knowing that you’re making the best decisions.
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Not sure what to do with your student loans?
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