You wanted to support your child by paying a big part of the cost of their undergraduate education. After all, the Stafford loan limits only allowed your son or daughter to take out a mid-four figure amount every year. The aid office sold Parent PLUS as a source of loans from the federal government that would cover all of the cost of attendance. Maybe you haven’t thought about how you would pay off Parent PLUS loans until recently.
Unfortunately, I’ve seen plenty of families where the parent owes a huge sum of Parent Plus loans and it’s interfering with their retirement goals. If you have to pay off Parent PLUS loans after funding your child’s education, the good news is you have more options to pay them back than you think. I’ll highlight the four best strategies I’ve seen to get parents out of Parent Plus student loan debt.
Using PSLF For Parent PLUS Loans
Many parents have a misconception that Parent PLUS loans aren’t eligible for loan forgiveness for public servants, also called the Public Service Loan Forgiveness Program. They are eligible for this benefit but face significant hurdles to qualify.
Here’s an example that might apply to you. You’ve worked for decades in the public sector and wonder if there’s a way that you can get your experience to count retroactively for the 10 years of payment history needed to receive tax-free loan forgiveness.
There are several catches. To get Parent PLUS loan forgiveness, you must:
- Consolidate Parent PLUS into a Direct Consolidation Loan
- Make Payments on the ICR Plan for 10 Years on the new Consolidation Loan
- Work Full time at a Qualifying 501c3 or Government Employer
You might ask what the ICR program is? It stands for Income Contingent Repayment (ICR). This plan requires you to pay 20% of your income above the federal poverty line for your family size.
For example, if your AGI (Adjusted Gross Income) on your tax return is $42,000 and your family size is 2, you would deduct $16,460 from the AGI and multiply the result by 20%. Hence, the ICR payment in this scenario would be $5,108 over the course of the year, which would be split up into monthly payments of about $425.66.
The issue with the ICR program is that your payments can get very high very quickly. Other income-based programs like REPAYE and PAYE only ask for 10% of your income and they give you a higher deduction. These payment plans are not available for Parent PLUS loans.
Hence, the typical parent who would pay off her Parent Plus loans before receiving any forgiveness. Usually, parents have not consolidated their loans yet before they contact me, which means the additional 10 years of full-time work usually kills the idea as well. For some though, PSLF could be a saving grace.
Refinancing Parent Plus Loans into Your Name Only
If you want to know how to pay off Parent PLUS loans quickly, refinancing is worth looking into. Virtually every major lender will agree to refinance Parent Plus loans into your name only. After all, Parent Plus loans are legally your responsibility, not your child’s.
Some parents prefer to keep it that way. The most common arrangement I’ve seen with clients and readers is, “I’ll pay for undergrad, but you pay for everything after that!”
Of course, some parents take the other side and view this loan as their kid’s loan that they’ll take on once they’re able. There’s no right or wrong answer but choosing between these approaches carries big implications for your lifestyle.
If you plan to refinance Parent Plus student loans into your name alone, you need to plan on working for another 10 years. Your 50s and 60s are prime years for deferring money for retirement. It’s very likely that you’ll be in a lower income tax bracket once you quit working.
Furthermore, you can make $6,000 catchup contributions to 401k and 403b accounts. This increases your max retirement contribution to an employer account all the way to $24,500 as of 2018. If you’re married, multiply that number by 2 for the total contribution you could make together.
Parent PLUS loan repayment can make those contributions more difficult. I would suggest that if you do refinance Parent Plus that you get rid of it in a hurry. You want to shoot for a repayment period of fewer than 5 years, so you can go into retirement unburdened.
For example, a parent with $30,000 of Parent Plus loans could refinance that amount to a 3.5% interest rate and pay $546 a month to have it all done within 5 years. That kind of payment is very doable if your child’s loan is a low to mid five figure balance. You’d also save thousands of dollars in interest by refinancing.
For balances below $50,000, refinancing is usually the way to go. However, when you have more than that, the math gets much more challenging.
You should not refinance Parent Plus if you’re planning to use Social Security for most of your retirement income. As we’ll see later, the math just doesn’t make sense.
Refinancing Parent Plus Loans into Your Child’s Name Only
This is a very popular option with families who had to take out loans for multiple kids for school. To transfer a Parent PLUS loan to a student or recent grad, you can refinance the debt into the child’s name. It’s far superior to just have your kid write a check to you for the monthly payment.
After all, you’re paying the government 7% or more on a Parent Plus, which doesn’t make sense when you can slash that interest cost by refinancing.
The process is more cumbersome when you’re refinancing Parent Plus loans into your child’s name, but it’s very doable and I’ve helped readers accomplish this through my cash back bonus links.
If you’re going to transfer the debt to your child’s name, you want to make sure that your kid is very financially stable. There’s nothing worse than having your entrepreneurial ambitions restrained by a huge required monthly payment.
You cannot consolidate the loan to your kid’s name and keep it on the federal system, unfortunately. The only way to get a Parent Plus loan payment based on income is to use the final of the four strategies for paying back Parent Plus.
Going For Parent Plus Loan Forgiveness as a Retiree
I have seen incredibly little written about this strategy online, and using Parent Plus loan forgiveness as a retiree could allow your family to keep vastly more wealth and allow you to retire sooner.
If I’ve got your attention from that, then good because this stuff can get confusing.
The only way to get payments based on income with Parent Plus is through federal direct consolidation. When consolidating, you only want to include Parent Plus loans. That’s because the new Direct Consolidation Loan will only be eligible for ICR, and you don’t want to mess up loans you took out for your own education that weren’t for your children.
Once you call your loan servicer and secure the consolidation, now your payments are 20% of your income (specifically Adjusted Gross Income or AGI) after deducting 100% of the poverty line for your family size.
This is an absolute game-changing strategy for someone with more than $100,000 of Parent Plus loan debt who relies on Social Security for most of their retirement income. In fact, according to AARP, about 49% of elderly Americans rely on Social Security for the majority of their retirement income. About 24% rely on it for over 90% of their retirement income.
We don’t have great data on this, but I’d guess that the population of Parent Plus borrowers is not as rich as elderly Americans on average, otherwise why borrow for your kid’s school right?
Hence, my guess is there are hundreds of thousands if not millions of Parent Plus loan borrowers who will have a modest income in retirement.
How Could Parent Plus Loan Forgiveness Work in Practice
Here’s how this strategy would work. Imagine Tim took out $150,000 of Parent Plus for his three daughters to complete college. Tim is 64 years old and plans to retire from his job as a car mechanic at 66. He’ll claim his monthly Social Security of $1,800 a month and Tim’s wife Margaret will claim her $1,500 a month of Social Security at that time too.
Their income will be $60,000 combined for the next two years, and then it will drop to $39,600. Let’s assume Tim has a small pension that he makes that will bring their combined income up to $45,000.
Tim could consolidate and attempt to use an economic hardship forbearance for the next two years he’s working to avoid payments.
Then he could consolidate when he retires. He’s living on Social Security alone, and since his taxable income is above $44,000, up to 85% of his Social Security is taxable.
That makes his AGI 0.85*39,600+5,400=$39,060.
Thus, his ICR payment would be 20% of $39,060 minus 100% of the federal poverty line for a family size of 2 ($16,460), which works out to about $376 a month.
Tim could pay this amount for 25 years, and then his forgiven balance would be considered taxable income. At that point, Tim would be 91 years old. Who do you think would win in a collection of a six-figure balance, Tim or the IRS?
Here’s a summary of what the above scenario would look like.
My guess is that the IRS would apply the insolvency rule and wipe away the debt. I doubt he would have to pay that $98,000 tax bomb. Tim could also agree to some installment payment that’s a percent of his income, or he could have already passed away and not have to worry about it anymore.
If You Have No Retirement Income Except Social Security, Your Student Loan Payment is Probably $0
Keep in mind that the reason Tim and Margaret had a payment at all is that their total income was in the mid-five figures.
If we were just talking about a single parent living on one social security paycheck alone, then it’s very likely the payment would have been 0.
There are plenty of retirees living well on only Social Security checks in South Florida. The nice part about this strategy is that if you have very little saved for retirement even though you owe a bunch for your child’s education, you can still actually retire.
That’s a game changer for many families out there.
1. Can a Parent PLUS loan be transferred to the student?
Yes, students can take on their parents’ PLUS loans by refinancing through a few private lenders.
2. Can Parent PLUS loans be income-based repayment?
Federal Parent PLUS loans are not eligible for income-based repayment.
3. Can you refinance a Parent PLUS loan?
Yes, you can refinance through a private lender if you wish to pay off your loans faster and you’re not planning to use Social Security for most of your retirement income.
4. Is a parent PLUS loan tax deductible?
The interest you pay towards a student loan, including a PLUS loan, may score you a break at tax time. Currently, the most you can deduct is either $2,500 or the total amount of student loan interest you paid, whichever is less.
5. What happens if you don’t pay on a Parent PLUS loan?
If you don’t pay your Parent PLUS loan, it will go into default.
Know What You’re Doing When You Pay Off Parent PLUS Loans
Parent Plus is the red-headed orphan stepchild of the federal student loan portfolio. There are about 3.5 million borrowers at this point in 2018, and many owe six figures. If that’s you and you’re looking to learn everything you need to know about Parent PLUS loans, you’re not alone.
The interest cost is higher so at first glance it might seem like refinancing is always the answer if you want to make Parent PLUS loans affordable. However, if you look at the math it’s a lot more complex. If you know you need to refinance, check out some of the cash back bonus links on our site.
If you want a custom plan, that’s what we specialize in. Feel free to reach out to us with the contact button.
If you’re currently trying to pay off Parent PLUS loans, we’d love to hear your thoughts. Do you have an experience you want to share about how you borrowed them or if you feel like you were misled? Do you think kids should have to pay all the Parent Plus loans back?
Share your feelings below.