Borrowers who have Parent PLUS Loans deal with somewhat of a different beast than when a student borrows federal student loans. Parent PLUS Loans stay in the name of the parent who pulled them out, if kept in the federal system. They generally have much higher interest rates than Direct Loans and don’t offer forgiveness opportunities. Parent PLUS Loans also have far fewer repayment options available (e.g. amortized standard fixed and graduated repayment plans).
We’re going to cover a loophole you probably haven’t heard about before: the Parent PLUS double consolidation. It’s a game changer. This strategy could drop your payment from 20% of your income to 10% of your income.
Refinancing Parent PLUS Loans to private student loans
A few options we’ve written about in the past have included private refinancing and consolidation. With Parent PLUS Loan refinancing, you take these federal loans out of the federal system and obtain a new loan with a private lender like Commonbond or Laurel Road. The goal is to get a lower interest rate and snag more favorable terms.
Student loan refinancing works great for folks in a couple of different situations assuming their credit is in a good place, such as:
- When the student loan debt balance is lower than their annual income and they feel confident in committing to that payment and term.
- When there’s a need or desire to transfer ownership of the loan to the student/child and their credit and financial situation allows them to commit to that payment and term.
If refinancing doesn’t seem to be the right fit — because of poor credit or the balance is much higher than income making the repayment terms difficult to commit to — consolidating within the federal system is a way to open the door to one income-driven repayment plan (IDR): Income-Contingent Repayment (ICR).
Parent PLUS double consolidation
You can consolidate into a Direct Consolidation Loan even without another loan and have access to ICR. This plan is based on 20% of discretionary income and has a maximum repayment period of 25 years. It also qualifies for loan forgiveness programs, like the Public Service Loan Forgiveness program if your employment meets eligibility requirements.
If refinancing isn’t a viable option, and consolidation does not bring relief with the 20% calculation, you can entertain a process called Parent PLUS double consolidation.
How Parent PLUS double consolidation works
Double consolidation is not something your servicer will offer as a strategy for repayment. The federal Direct Consolidation Loan application and process is also very tedious and time-consuming. However, it CAN open the door for access to Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE), and IBR.
These are lower IDR repayment options that were not initially available to Parent PLUS Loans or consolidated Parent PLUS Loans. Let’s get technical:
- A consolidation loan that includes a consolidation that paid off a Parent PLUS Loan is NOT the same as a Consolidation loan that paid off a Parent PLUS Loan.
You essentially wipe out the Parent PLUS Loan code by consolidating twice.
This technicality is critical because of the way student loans are administered and how the laws were written for identifying what repayment options are available for a loan code. This legal “loophole” allows the double-consolidation process to open the door for accessing REPAYE, PAYE (if you hadn’t borrowed prior to October 1, 2007) and IBR.
Could this work for you?
First and foremost, let’s review some terminology and how consolidations work:
- Parent PLUS Loans can consolidate themselves into a Direct Consolidation Loan. This means the double-consolidation process could be successful with as little as two Parent PLUS Loans consolidating individually on the first round.
- Unlike Parent PLUS Loans, Direct Consolidation Loans need one other loan to consolidate with.
- Parent PLUS Loans can consolidate with non-Parent PLUS Loans. But it might be best to keep them separate if possible.
- If you only have one Parent PLUS Loan (and no other federal loans), your only opportunity is to consolidate that one loan into one Direct Consolidation Loan and have access to ICR or private student loan refinance.
Parent PLUS double consolidation steps
If it sounds like this would work for you, here are some next steps and notes:
1. Fill out paper consolidation applications. For the first round of consolidations, you will want to submit paper applications. This includes one application for consolidating one or more loans, and the second application for consolidating the other loan(s) left out from the first application. You will mail to two different servicers to avoid having them added into the same consolidation (which defeats this process’s purpose). Loan servicers and contact information can be found on the Federal Student Aid website.
2. Include an IDR application for ICR. In the application mailer, include an IDR application electing the ICR plan. If you don’t, the consolidation will be denied for no repayment plan elected.
3. Mail your consolidation paperwork. Use certified mail to ensure delivery to the servicers.
If you’re going for PSLF, don’t send an application to FedLoan first. Consolidations take 30 to 90 days to complete in which your loans will be put into forbearance or deferment while the process is underway.
You can find your corresponding loan codes and account numbers by logging into studentloans.gov. Click on the “consolidate my loans” section. You should see a long list of your loans. You can see the titles of each individual loan by hovering over the question mark box with your mouse and the name should pop up.
Reminder: DON’T submit your application online this way — the first round should be via paper application.
Wait for your confirmation that both consolidations were processed by the different servicers and you have payment schedules. Once that is confirmed, you can proceed to the last steps:
4. Do the online consolidation application for the final consolidation.
5. Choose your final servicer. You’ll select this from the drop-down menu in the online application. If going for PSLF, choose FedLoan Servicing. If not, choose a servicer you haven’t sent a consolidation application to yet.
6. Complete the online IDR application. When completing the online IDR application, elect REPAYE, PAYE, or IBR repayment plans.
7. Make your monthly payments and recertify annually.
Case study #1: Parent PLUS double consolidation with PSLF
Sara is a single mom and borrowed loans to send her two sons to college. She works for a 501(c)(3) nonprofit and is interested in pursuing PSLF.
Here’s Sarah’s loan list:
Direct PLUS Parent
$43,000 (Son #1)
Direct PLUS Parent
$35,000 (Son #2)
Her current payment on the Standard Extended Fixed Plan is $575 per month for 300 months. She knows there is efficiency to be achieved with PSLF, so she needs to have the right type of loans (Direct) and be on an IDR plan to qualify.
Consolidation process #1
Sara consolidates each Direct PLUS Parent loan individually.
- She mails in a paper consolidation application to Nelnet consolidating one Direct PLUS Parent Loan. Additionally, she includes an IDR application for ICR in the mailing packet.
- Sara mails a second paper consolidation application to Great Lakes, consolidating the other Direct PLUS Parent Loan she didn’t include on the first application. She also includes an IDR application for ICR in the mailing packet.
- She waits. Her Direct PLUS Parent loans are successfully consolidated into a Direct Consolidation Loan at both Nelnet and Great Lakes.
Consolidation process #2
Sara then completes the online consolidation application.
- She now consolidates BOTH loans together by logging into studentloans.gov and including them both in her online application.
- Sara sends them to FedLoan Servicing since she’s going for PSLF.
- She completes an online IDR application for REPAYE. This plan is based on 10% of discretionary income and household size. She also submits her Employer Certification Form (ECF) for PSLF.
Sara’s adjusted gross income (AGI) is $80,000, so her new payment under REPAYE is $511 per month. This payment is slightly lower than the 25-year plan she was on and now she will achieve PSLF forgiveness after 120 payments (10 years). Her estimated forgiven balance will be $65,000!
Case study #2: Consolidating Parent PLUS Loans and Direct Loans
A second case study is for Sam who has Direct PLUS Parent loans and his own federal loans.
Sam borrowed for his daughter’s education. He also has loans from his own education funding.
Here is Sam’s loan list:
Direct Consolidated Unsubsidized
Direct PLUS Parent
Direct PLUS Parent
Direct PLUS Parent
Sam’s current payment on the Extended Graduated Plan is $1200 per month. He is entering retirement and this will severely impact his cash flow. So, he begins the double-consolidation process.
Consolidation process #1
Since Sam has his own loans, we want to leave those out of this consolidation for now.
- Sam puts his Direct consolidated unsubsidized and FFEL consolidated loans in forbearance for six months. This pauses his payments while he completes the consolidation for the Parent PLUS Loans.
- He mails in a paper consolidation application to Nelnet consolidating one Direct PLUS Parent loan. Sam includes an IDR application for ICR in the mailing packet.
- Then, he mails in the second paper Consolidation application to Great Lakes consolidating the other two Direct PLUS Parent Loans he did not include on the first application. Sam includes an IDR application for ICR in the mailing packet.
- He waits. His Direct PLUS Parent loans are successfully consolidated into a Direct Consolidation Loan at both Nelnet and Great Lakes.
Consolidation Process #2
Sam then completes the online consolidation application.
- He now consolidates just the consolidated loans at Nelnet and Great lakes together by logging into studentloans.gov, and still leaving his own loans out.
- Sam sends them all to the servicer, Navient.
- He completes an online IDR application for REPAYE, which is based on 10% of discretionary income and household size.
Sam’s joint AGI for him and his wife is $60,000. So, his new payment under REPAYE is slightly higher than $288 per month.
*Since Sam has one FFEL loan that’s not eligible for REPAYE, this loan’s payment is specifically based on 15% of discretionary income instead of 10%, slightly increasing his payment. Sam could complete another consolidation in the future consolidating his two education loans together, but that application would likely need to be done via paper and sent to FedLoan.
This lower payment will help him manage retirement better, giving him about $900 per month back in his cash flow. This is a big difference compared to his original payment of $1200 per month (which would increase every two years on the graduated repayment plan).