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. And the financial aid office sold the Parent PLUS loan program as a source of student 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 loan balance of Parent Plus loans and it’s interfering with their retirement goals.
If you have to pay off a Parent PLUS loan after funding your child’s education, the good news is you have more options to pay it back than you think. I’ll prove it to you because you can download this calculator we built to see why you might not need to actually pay your Parent PLUS loan off.
Here’s the five best strategies I’ve seen to get parents out of Parent Plus loan debt.
1. 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.
Parent PLUS Payment Example
For example, let’s say your Adjusted Gross Income (AGI) on your tax return is $42,000 and your family size is two. You would deduct the current poverty guidelines amount of $17,240 from the AGI. And multiply the result by 20%. Hence, the ICR payment in this scenario would be $4,952 over the course of the year, which would be split up into monthly payments of about $412.67.
The issue with the ICR plan is that your payments can get very high very quickly. Other income-driven repayment plan 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.
2. 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 student loans, 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.
Don’t Let High Student Loan Payments Reduce Your Retirement Savings
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 $6,500 catch-up contributions to 401k and 403b accounts for 2020 and 2021. This is in addition to your annual contribution limit of $19,500, which means your max retirement contribution to an employer account is increased all the way to $26,000. If you’re married, multiply that number by two 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 plan with a period of fewer than five 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 five 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 to a lower interest rate. Additionally, you can speed up your repayment plan and save even more by making extra payments.
For a loan balance 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 student loans 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.
3. 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 than just having your kid write a check to you for the monthly payment.
After all, you’re paying the government at a 7% interest rate or more on a Parent Plus loan, which doesn’t make sense when you can slash the interest rate 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 with the Department of Education federal system, unfortunately. The only way to get a Parent Plus loan payment based on income is to use the final strategies for paying back Parent Plus.
4. 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 the ICR plan, 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 Strategy Works Well for Retirees Depending on Social Security
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’s Fact Sheet, about half of people aged 65 and older rely on Social Security for at least half of their family income. And about 21% rely on it for over 90% of their 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.
5. Double Consolidation: The Most Powerful Parent PLUS Loophole
Parents living mostly off Social Security income in retirement would likely have an extremely low AGI. That’s why paying 20% of your AGI minus 100% of the federal poverty line with the income-contingent repayment plan can make sense.
However, what if there was a way to pay 10% of your income instead of 20%? Middle and upper middle income parents who were formerly not good candidates for forgiveness could suddenly have a huge amount of debt forgiven.
We’ve written an entire article on the Parent PLUS double consolidation loophole.
It’s not for the faint of heart, but if you’re willing to put in the time following our guide how to use it, you could cut your payments by more than half. You could also book a consult with us and we’ll walk you through the process.
That’s because other income driven repayment plans not only take a lower percent of your income, they also give you a larger deduction before you have to pay anything (150% of the poverty line instead of 100%).
How Could Parent Plus Loan Forgiveness Work in Practice
We’ll cover the ICR and Parent PLUS strategy because it’s the simplest to illustrate.
Imagine Tim took out $150,000 of Parent Plus loans with a 6% interest rate 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 x 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 two ($17,240), which works out to about $364 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 $95,000 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.
How to drastically reduce your payments with double consolidation
As mentioned, there are other income-driven repayment plans that factor in a lower percent of your income. For example, the Pay As You Earn (PAYE) plan uses 10% of your discretionary income. But to access these additional repayment plans, you’ll need to take advantage of the Parent PLUS double consolidation loophole.
So, what would your payment look like if you used the double consolidation strategy with PAYE?
Using Tim and Margaret’s previous example, his PAYE payment would be 10% of $39,060 minus 150% of the federal poverty line for a family of two ($17,240), which would drop his payment down to just $110 per month.
Tim could then make 20 years of payments and have his remaining balance forgiven. Here’s the kicker. His total payments would come out to about $28,000, which is a huge savings compared to the $135,000 he’d pay under the ICR plan in the previous example.
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.
FAQ for Parent PLUS Loans
Here are some of the more common questions we get from parents who owe a ton of debt for their child or children’s education.
1. Can a Parent PLUS loan be transferred to the student?
Yes, students can take on their parents’ PLUS loans by refinancing through a couple private lenders mentioned earlier in the article. And as an added bonus, refinancing can help score a lower interest rate and save thousands in total interest costs.
2. Can Parent PLUS loans be on income-based repayment?
Federal Parent PLUS loans are not eligible for Income Based Repayment, Pay As You Earn, or Revised Pay As You Earn. The only income driven repayment plan Parent PLUS is eligible for is Income Contingent Repayment (ICR). Even then, you must first consolidate your Parent PLUS loan through studentloans.gov to be eligible.
There is a potential loophole called “double consolidation” that could allow Parent PLUS loan borrowers to access better repayment plans than ICR. In practice, this is very difficult to execute on your own.
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. Our refinancing partners have best in class welcome bonuses paid in addition to lower interest rates.
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. This is an above the line deduction, meaning you do not have to itemize to claim it.
The student loan interest deduction is subject to a phaseout based on income.
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. The government can garnish your wages or Social Security to get paid, so do not take this action as there are better options available.
Strategically Pay Off Parent PLUS Loans or Plan on Expensive Mistakes
Parent Plus is the red-headed orphan stepchild of the Department of Education student loan portfolio. There are about 3.6 million Parent PLUS loan borrowers as of the last quarter of 2020, and many owe a loan balance of 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 total 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 what you’re going through. Just post a comment below and we’ll respond.