Borrowers over age 60 are the fastest growing segment of student loan market. I suspect one of the major reasons is the expansion of the Parent PLUS program. If you have this kind of loan, I want to apologize in advance. Parent PLUS is the red-headed stepchild of the federal student loan portfolio. You might be able to get Parent PLUS loan forgiveness on these loans and the government is not even telling you how.
Unlike Direct loans made in the name of your kids, Parent PLUS loans are not eligible for any kind of income-driven assistance or loan forgiveness. However, there is an amazing loophole that you need to know about. You can change your loan into a Direct Consolidation Loan.
Now your Parent PLUS loans get:
- Income Contingent Repayment (ICR – 20% of your discretionary income, defined as your AGI minus 100% of the Federal Poverty Line for your family size
- Public Service Loan Forgiveness – If you work at a not for profit or government employer full-time, you can pay on ICR for 10 years and have the remainder forgiven tax-free at the end
- 25-year private sector forgiveness – If you do not qualify for another kind of forgiveness, you can pay on ICR for 25 years. At the end the government forgives the balance but you owe taxes on that forgiven amount
If you took out Parent PLUS loans in the first place, you probably aren’t rich. That means a huge number of Parent PLUS borrowers could be focusing their efforts on retirement and using cutting-edge strategies for minimizing their loan costs.
How Many People Have Parent PLUS Loans Compared to Other Types?
There are almost three times as many Parent PLUS borrowers as Grad Plus as you can see below. Both of these loans have the same terms with a very high-interest rate and a 4.27% origination fee. You can tell that Parent PLUS loans are small compared to Consolidation or Stafford loans. That’s why I wanted to write this article because of the lack of info on this unique category of student debt.
While the chart below shows the average Parent PLUS balance at roughly $24,000, I’ve seen far greater sums than that. If you’re wondering how to pay off Parent PLUS loans quickly, refinancing may be an option worth considering if your situation applies.
For a borrower with a “small balance,” you are likely best-off refinancing with a private lender and getting a cash back bonus of up to $500. You can refinance in your name or your child’s, whichever your family prefers. You could probably cut your interest rate by anywhere from 2% to 4%, which yields immediate savings.
The strategy of borrowers with small amounts of Parent PLUS is straightforward. You won’t be able to get PSLF or loan forgiveness on $20,000. Your payments of 20% of your discretionary income will force your hand to pay the loan off before receiving a benefit.
However, if you owe a high five-figure or six-figure amount and can’t afford parent PLUS loans, a ton of options start opening up to you that you might not have thought about.
I’ve worked with Parent PLUS borrowers who have owed anywhere from $100,000 to $300,000 on a regular basis.
How did these balances rise so high?
The Parent PLUS borrowing limit is equal to the cost of attendance. Unlike Stafford loans that are subject to strict limits, Parent PLUS has no such limit. That means parents who send their children to expensive schools take out these super expensive 7% to 8% federal loans.
Now imagine what happens when you borrow for multiple children. You can easily end up with a six-figure amount after sending a couple kids to private schools. The strategies I’m about to dive into could be a lifesaver for parents with massive six-figure balances.
How to Get PSLF with Parent PLUS Loans
I am very concerned that millions of Parent PLUS borrowers do not receive PSLF when they should be entitled to it. If you don’t consolidate your Parent PLUS loan, then your payments will not count towards this program.
You will receive offers of Extended and Graduated payment with the standard Parent PLUS loan, neither of which qualify for Parent PLUS.
Let’s look at a real-life example to understand how much money is at stake.
Jake is a city employee for the Parks division and is 48 years old. He just sent his two daughters to expensive private schools. Since he didn’t have the funds to pay out of pocket and he didn’t want to start his mortgage over again by tapping his home equity, Jake took out Parent PLUS loans.
After the younger one graduates, Jake gets a letter showing a balance of $120,000. His salary of $60,000 is not to enough to make the 10-year payments they want him to make of over $1,200 a month.
Jake’s wife Talisha works for the city as well part-time and earns $30,000. How could Jake qualify for PSLF for his Parent PLUS Loans and have the balance wiped away after 10 more years of service?
1. Parent PLUS loan consolidation into a Direct Loan.
Only Direct loans have PSLF in the promissory notes. That means to even have the option of Parent PLUS loan forgiveness, Jake has to consolidate. He can do that by calling this phone number at the Department of Education: 1-800-557-7392.
He needs to beware to only consolidate his loans with each other, otherwise, he could lose access to better Parent PLUS loan repayment plans on loans he took out for his own education.
That said, he calls that number and checks the box that he’s going for PSLF. He sends the loans to FedLoan Servicing, which has a monopoly given by the government on the PSLF program.
2. Sign up for the ICR Payment Plan
Now Jake needs to apply to pay on his income. He has to include Talisha’s income unless they file a separate federal tax return. Jake has to pay a monthly amount equal to 20% of his discretionary income.
Please note that the deduction determining discretionary income is different for Parent PLUS loans. The government only allows a deduction of 100% of the Federal Poverty Line instead of 150% like they do with other loan types.
3. Save the Maximum in the Family Retirement Accounts
This is assuming that Jake and Talisha have most of their big fixed expenses under control. What I’m going to suggest will be an extreme example and they wouldn’t have to do this. However, if they can reduce their taxable income, they can increase the value of the PSLF program. Recall they have $90,000 of joint income before we adjust it.
We’ll assume both save $18,500 a year in their 401k or pre-tax retirement program. That reduces their taxable income by $37,000 a year. That now makes their taxable income $53,000.
Keep in mind that if Jake and Talisha were over 50, they would be able to shield an additional $6,000 each. That’s called the catch-up contribution.
Very high savings rates for retirement are realistic for parents of college-aged students. You might look at your low retirement balances and realize you need to hustle to get something into your accounts so you can eventually quit working.
The Direct Parent PLUS Consolidation qualifies for PSLF is the parent whose name the loan is under works at a qualifying employer. Jake most certainly qualifies as a full-time city employee.
How Much Could PSLF for Parent PLUS Borrowers Be Worth?
Using this exact example we’ve been developing, let’s look at how much money Jake and Talisha could save by using PSLF instead of paying back all their loans through refinancing. I’m assuming their alternative to ICR w PSLF is a 4.5% private refinancing deal also with a 10-year term.
The ‘Total Cost’ Column is incredible. Jake and Talisha can pay almost half of what they would on PSLF compared to refinancing. At the end of 10 years, Jake would have $119,000 forgiven tax-free. Additionally, they would have contributed $37,000 a year toward retirement and be on track for more comfortable golden years.
If they saved with the catch-up contribution too, the numbers would be even more compelling.
What do most Parent Plus borrowers do though? They get screwed over by a complex system and never end up consolidating their loans until it’s too late to receive the benefit.
How to Get Parent PLUS Loan Forgiveness in the Private Sector
Receiving loan forgiveness on Parent PLUS loans is far more difficult when you work at a private employer. Paying 20% of your discretionary income usually pays off the loan in full before the necessary 25-year period required to claim a benefit.
Recall you can only use ICR for your Parent PLUS loans. That means the only way to receive loan forgiveness as a private sector employee for Parent PLUS is to minimize your taxable income aggressively. Keep in mind that one of those ways is by saving for retirement.
Pretend Donna is a 65-year-old nurse for a for-profit article. We’ll assume she’s single and sent her three kids to college. Unfortunately, she owes $200,000 for their loans. Although the children want to take on the debt, she is too proud to let them do that.
Donna could refinance her student loans and pay over $2,000 a month for 10 years, but this would crush her retirement goal of stopping work at 70. Donna earns $70,000 a year and has access to a retirement account at work.
She decides to budget $24,500 a year to her 401k for the next five years. She will delay Social Security benefits until 70 because she’ll get a 40% higher benefit than if she claimed them at the full retirement age. We’ll assume that her AGI after including some of her retirement income will be $35,000.
Unlike PSLF, with the 25-year ICR plan in the private sector, you must pay taxes on the forgiven balance. I’ll model the impact of this in the chart below. We’re comparing Donna refinancing her loans to using the 25-year ICR option with the tax bomb.
Donna the nurse could pay the loans off in 10 years by working until she’s 75, but her body could give out before then. After all, nursing is a physical job. Donna would pay over $253,000 over these 10 years. In terms of today’s dollars (also known as present value), the cost is about $204,000.
What if Donna instead used ICR? She could pay a total of $119,590 over 25 years. In the end, she would owe $430,000 and would owe taxes of around $172,000 assuming a 40% rate. Would this ruin her?
I highly doubt it for a couple reasons we’ll discuss. For now, you can see the total cost is the payments and Parent PLUS tax bomb combined, totaling about $291,000. Since most of that happens in 25 years, adjusting for our 5% investment return, we can say that the cost in today’s dollars is about $71,500.
That’s over $130,000 cheaper in today’s dollars compared with refinancing. That’s obviously the better choice. What’s troubling is that borrowers like Donna will work for years longer than they have to because they don’t know how to use loan forgiveness strategies.
Parent PLUS Tax Bomb Will Probably Have No Teeth in it for the Middle Class
A Parent PLUS tax bomb could be devastating to the portfolio of a retiree. However, two rules could effectively take the teeth out of it.
The IRS would almost surely not foreclose on your home to settle an income tax debt. Also, there is something currently called the insolvency rule. The IRS considers anyone with more debt than assets “insolvent” and does not tax forgiven debt as income in this case.
This is morose to suggest, but another reason Donna might not have to worry is that loans are forgiven in the event of death. While you obviously would not want this to happen, at least she would know her debts would not follow her children after her passing.
In almost every situation, I think that Donna would come out fine with the tax bill. That said, if she’s worried she could also prepare for it by putting away about $1,000 a month while working in a Vanguard mutual fund account and letting it grow until she has the amount needed to pay the tax. That’s the best strategy.
Parent PLUS Loan Forgiveness Fails Because Borrowers Like You Don’t Understand their Options
If you took a Parent PLUS loan out, it’s because you wanted your kids to have a great future and a good education. One of the reasons the sticker price for college is so high today is because there is so much easy money floating around the higher education market in the form of government loans.
If you owe less than $50,000, then refinancing might be the way to go. Perhaps if you owe more than that and your kids want to take the debt off your plate, you might be interested in doing that as well.
However, if you want to be the one to pay the debt and you owe a very large amount, you deserve to know about your options for Parent PLUS loan forgiveness. If you work at a not for profit or government employer, use ICR and go for PSLF in 10 years.
If you feel like you’ll never pay down your debt, game the system and max out your retirement accounts so you can quit working using the 25-year private sector option.
You’ve worked too hard to support your family not to look into ways you could make bearing this debt easier on yourself.
If you need help figuring this out, we make custom student loan plans for families who owe more than $100,000, and we’ve even counseled individuals who owe $1 million. If you need help determining strategies for repaying federal Parent PLUS loans, reach out by clicking the button below.
We’ll see how much money we might be able to save you on your Parent PLUS loans.
Refinance student loans and get a bonus in 2019
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