Many parents choose to take out Parent PLUS Loans to help their child or children afford the cost of college. While they may not be able to pay the full expense of college up front, they still want to help their children avoid the weight of debt that goes along with taking out student loans. In many cases, however, you may find that you eventually want to refinance your Parent PLUS Loans–and there are several reasons why this could be one of the best financial decisions you make.
What Is a Parent PLUS Loan?
A Parent PLUS Loan is a loan taken out for the cost of education. Instead of being the responsibility of the student, however, this loan is taken out in the parent’s name. Typically, Parent PLUS Loans are taken out by parents who want to help with the burden of student loan debt, helping to pay for their students’ college even though they don’t have the ability to do so up front. There are several characteristics of Parent PLUS Loans that make them ideal for many parents with students headed off to college–but there are also situations in which they may not be the most effective choice up front.
They have fixed interest rates. The interest paid for a Parent PLUS Loan won’t increase throughout the lifetime of the loan or based on the current market, making it the preferred solution for parents who want to know what their payments are going to look like throughout the life of the loan.
Parent PLUS Loans often have higher interest rates than direct student loans. For this reason, many lenders recommend that students exhaust their own options for taking out student loans before turning to the Parent PLUS option. Parents can still cosign or help their students pay off the cost of those loans!
Parent PLUS Loans are available only to parents of undergraduate students. They’re intended to help pay off the cost of a bachelor’s degree and aren’t intended for use in paying for a master’s degree or PhD. Only parents who are legally responsible for the child in question are able to take out a Parent PLUS Loan: other relatives are ineligible for this type of loan to help students pay for college.
Parent PLUS Loans are available for the direct costs associated with the student attending college. This includes the actual cost of tuition, books, lodging, and other direct college costs. Any financial aid already acquired by the student is subtracted from the amount parents are eligible to take out.
Payment on a Parent PLUS Loan can be deferred until up to six months after the student graduates. This is the same grace period offered for student loans, making it the ideal solution for many students and their families.
Your credit score doesn’t have an impact on a Parent PLUS Loan. No matter what your credit score is, you’ll get the rate that’s set by Congress each year–and the same fees that go along with it. For parents with poor credit scores, this can be a check in the positive column; for parents with great credit scores, the added interest rates and increased fees associated with the loan are often daunting.
Why Refinance Parent PLUS Loans?
While Parent PLUS Loans seem like an ideal solution for parents who want to help their students pay for tuition, there are several reasons why you might choose to refinance these loans. Once your child has graduated, you aren’t stuck with the high interest rate forever. You can always refinance your loans–especially when you have good credit.
Reason #1: You Can Get a Lower Interest Rate
In many cases, a Parent PLUS Loan looks ideal at the time, but down the road, you’ll realize that you’re eligible for better rates if you choose to go elsewhere. Opting to refinance in favor of better interest rates will allow you to reduce the amount you’re paying on the loan over time, which can significantly reduce your overall expenses. Since Parent PLUS Loans have an interest rate that has hovered around 7% in recent years–an incredibly high rate compared to other options–you may find that you can save thousands of dollars in interest by refinancing your loan with a new lender.
Reason #2: You Need to Make Lower Payments
When you took out your Parent PLUS Loan, you were confident that you’d be able to make the monthly payments required of you and your student. Unfortunately, financial circumstances often change, and you’ve found yourself in the position of needing to make lower payments each month than your Parent PLUS Loan will allow. Especially if you’ve been paying on your loan for some time, you may be able to make lower monthly payments by refinancing the loan. Keep in mind, however, that this will lead to increased interest and, as a result, you’ll pay more for your student’s college over time than if you had been able to pay off your loan at the expected rate.
Reason #3: Your Credit Score Has Changed
When you first took out a Parent PLUS Loan, it was the best interest rate you could get–or perhaps the only loan you could take out. Mistakes on your credit history can make it difficult to secure a loan at any time, as can a high debt to income ratio. In the years your child has been attending college–or potentially the years since their graduation–on the other hand, you’ve managed to significantly improve your credit score for the better. As a result, you’ll be eligible for better rates than you would have been able to secure at the time you originally took out the loan. Refinancing can have a big impact on the interest rates you’re currently paying as well as allowing you to work out a payment schedule that will work better for you.
Reason #4: You Want to Change Your Payment Schedule
You set up a specific payment schedule that worked for you when your student was attending college or shortly after they graduated. In the years since then, however, you’ve discovered that you would rather make larger payments each month in order to pay off your Parent PLUS Loan sooner. By refinancing, you can set up a new payment schedule that will work more effectively for you, allowing you to get out of debt sooner.
Reason #5: Your Student is Able to Take Over Payments–or You’re No Longer Able to Make Them
You originally took out a Parent PLUS Loan because you didn’t want your student to have to worry about making payments on their student loans when they were fresh out of college and struggling to find the job they needed. As your student moves up in the world, however, they’ve found themselves in a position to pay off their own loans–and refinancing a Parent PLUS Loan in the name of the student who actually went to school is an option that you should seriously consider. Many students want to take on the responsibility for paying for their own education once they’re able to do so, preventing their parents from carrying the burden of their debt. In other cases, you may be willing to bear that burden only as long as necessary in order for your student to get their feet under them. Keep in mind, however, that you can only refinance the loan in the name of your child if they’re willing to accept that burden and sign the paperwork. As a result, you should be cautious when planning to use this method to ultimately cover the cost of paying for loans, since some students may take longer to get their feet under them or might not be willing to accept that debt.
Perhaps, in your ideal world, you’d pay off the Parent PLUS Loan for your student completely. Unfortunately, changing financial circumstances have made it too much of a burden for you to continue making those payments. If you’re no longer able to make the payments on this loan yourself or paying it off will create too much of a financial burden, you have the option to refinance the Parent PLUS Loan in your student’s name, allowing them to take on responsibility for those payments moving forward. This is a great way to help compensate for job loss, disability, failing health, or other issues that you couldn’t have anticipated when you originally took out the loan.
Taking out a Parent PLUS Loan is a great way to help your student pay for the cost of college even when you don’t have a great credit score or the ability to write a check on the spot for annual tuition. Knowing when to refinance your Parent PLUS Loan, however, can help you keep your finances balanced moving forward or move the responsibility to your student’s shoulders when they’re ready to accept it. If you need more help understanding the ins and outs of this important type of loan or how to handle refinancing, contact us today to learn how we can help.