When you took on Parent PLUS Loans it was likely because you wanted to do what’s best for your college-bound kid. Those loans helped them pay for school, but now that they’ve graduated, you’ll have to start repaying that six-figure debt just as you’re thinking about retirement.
You might worry that you won’t be able to afford the payments, if you retire. There are a handful of repayment options — including an income-based repayment plan for Parent PLUS Loans — to help make repayment more manageable.
Parent PLUS Loan repayment options
When it’s time to make your first payment, the Loan Simulator on StudentAid.gov offers you the following repayment options:
- Consolidated Standard Repayment
- Consolidated Graduated Repayment
- Extended Fixed Repayment
- Extended Graduated Repayment
- Income-Contingent Repayment (ICR)
Income-based repayment plans for Parent PLUS Loans
Scanning the list above, the only “income-based” or income-driven repayment option is the Income-Contingent Repayment (ICR) plan.
Here are some facts about ICR for Parent PLUS Loans:
- Borrower must consolidate Parent PLUS Loans into a Direct Consolidation Loan.
- Payment will be the lesser of 20% of their discretionary income, or the amount they’d pay with a fixed payment over 12 years, adjusted to income.
- Borrowers must update their income annually; payments adjust, accordingly.
- If married and filing taxes jointly, payments are calculated based on joint income.
- Repayment plan lasts 25 years with the remaining balance forgiven after 25 years. The balance will likely be treated as taxable income in the year it’s forgiven.
Graduated Repayment vs. income-based repayment plan for Parent PLUS Loans
Most borrowers choose the Extended or Graduated Repayment plans, because the payment feels the most manageable. However, these frequently carry a higher price tag over time.
For example, under the Consolidated Graduated Repayment Plan or the Extended Graduated Repayment Plan, let’s say a borrower and his spouse each make $75,000 per year, have a family size of four, and a student loan balance of $95,000 at 5.3%. The borrower’s lowest monthly payment option is $424 per month.
All Graduated Plan payments increase every two years. This means payments will be higher in retirement than when you first entered repayment. Not ideal.
Another downside of Graduated Repayment Plans is the total amount you’ll pay over time. For the income and loan scenario above, the total amount paid ranges from $188,000 to $210,000. These plans cause borrowers to effectively pay double their original student loan balance.
The Income-Contingent Repayment, however, boasts the lowest paid amount over time at $117,000. However, payments range from $1,200 to 1,300 per month.
How to decrease your Income-Contingent Repayment amount
Borrowers can adjust their income, allowing for a lower monthly payment under ICR. Below are four strategies to lower your payment under ICR for Parent PLUS Loans.
1. Maximize pre-tax retirement contributions
Contributing to pre-tax retirement accounts or health savings accounts (HSA) reduces your Adjusted Gross Income (AGI). Since the ICR plan uses your AGI to calculate your monthly payment, a lower AGI translates to a lower monthly payment.
2. Married borrowers can file their taxes separately
Typically, only one parent holds the Parent PLUS Loans, so filing taxes separately means only the borrower’s income (excludes spousal income) is considered for the ICR payment calculation.
There are some things you miss out on by filing separately, so it’s important to meet with a tax professional before taking this step.
3. Combine pre-tax savings and file taxes separately
Under this scenario, married borrowers file their taxes separately, but if their budget is tight, only max the borrower’s 401(k) savings. This could reduce their ICR payment by up to $800 per month using the example of the couple, above.
4. Borrowers can retire
If retirement is on the horizon, but you’re worried about your student loan repayment amount, consider that income-based repayment is based on your income. If you plan to retire and can live off of taxable savings or monthly Social Security payments alone, your payments will drastically decrease alongside your decreasing income.
Why Income-Contingent Repayment is better than refinancing
How does an income-based repayment plan like ICR compare to private refinancing? Refinancing might sound like a much better deal depending upon where interest rates are at a given time. If borrowers can’t take advantage of any of the money-saving strategies listed above, refinancing might be the way to go.
We’ve partnered with some great student loan refinancing companies, so it’s worth exploring this option, periodically. It’s also important to weigh the pros and cons of private refinancing before taking the leap.
Pros of refinancing student loans
- Lower interest rates
- Potentially lower payments depending on the loan term
- A lower amount paid over the life of the loan
Cons of refinancing student loans
- Most private loans don’t allow forbearance or a payment pause.
- You can’t re-enter the federal loan system after refinancing.
- If you die, your loan balance is still due by your estate or heirs. If you stay in the federal system on ICR, your loan balance dies with you.
- Payments don’t adjust with income changes.
Public Service Loan Forgiveness for Parent PLUS Loans
If you work for a public service organization and plan to continue doing so for at least 10 years, Public Service Loan Forgiveness (PSLF) is available. You’ll still need to consolidate your Parent PLUS Loans to get on an Income-Contingent Repayment plan.
It’s important to note that you can’t retire for 10 years from the date you start repayment using this strategy. PSLF requires full-time employment, which is 30 hours per week or the employer’s definition of full time, whichever is greater.
The game-changing Parent PLUS double-consolidation loophole
For borrowers who love a little complexity in their lives, the double-consolidation loophole lets you access even better income-driven repayment options.
As a reminder, an ICR payment is approximately 20% of your discretionary income. If you can endure the double-consolidation process (it’s not that bad), you can access income-driven repayment options that use 10% or 15% of your discretionary income. This could result in huge savings over the life of your loan repayment.
Here’s what to know about this Parent PLUS loophole.
1. You must have at least two Parent PLUS Loans.
Consolidation rules are tricky. You can’t and shouldn’t consolidate all of your loans together if you wish to access this loophole (loan servicers might tell you otherwise).
Speak with an expert before consolidating Parent PLUS Loans with older Student Loans. This could be a big mistake depending on your situation.
2. Split your Parent PLUS Loans in half and consolidate each half with two different servicers.
Using a paper and mail process, you’ll consolidate one set of loans with one servicer, and consolidate the second set of loans with a different servicer. Mail the paperwork separately to each servicer and wait to hear back.
3. Consolidate your two, separate consolidation loans together online.
You can leave the paper behind for this step, and use StudentAid.gov to submit the forms.
4. Unlock all income-driven repayment options.
By consolidating on two separate occasions over a period of time, you’re removing the “Parent” from your loans. Once the “Parent” association is gone, you can access other income-driven plans like PAYE, REPAYE, and IBR, which can lower your payment dramatically.
Our Parent PLUS expert and consultant, Meagan Landress, wrote on the double-consolidation loophole strategy, including examples. You can meet with Meagan, if you’d like to work through this approach. Any and all SLP consultants can walk you through the process as well.
We can’t promise this loophole will be around forever. We can’t promise that Parent PLUS Loans will always look the same as they do now. However, if you need our help navigating this overly-complex system, we’re here to help!