parent plus loan; stressed parent worried about paying for student's collegeTo keep their children out of debt, many parents opt for federal parent PLUS loans. These are educational loans taken out by parents so they can help pay for their child’s college education. Millions of parents took out these loans and now owe a total of around 89 billion dollars to the government.

It’s a noble notion to protect your kid from debt and help them pay for college, but it can hurt your own financial situation if you aren’t careful about repayment. Here, we explain how parent PLUS loan repayment works and how you could pay less than what you owe.

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Paying back your parent PLUS loans

You will likely make payments on your parent PLUS loans for years to come. These methods can help you repay more effectively:

Standard repayment

This is an automatic repayment plan that lasts 10 years with monthly payments that go toward paying off your total loan amount. These payments may be higher than the other repayment options here because it’s the default repayment plan.

Forgiveness programs

Aiming for parent PLUS loan forgiveness means playing the long game. To be eligible for any type of forgiveness, you must consolidate your loans first. This often means an extended payment period.

Consolidation

Going through StudentLoans.gov, you can use a Direct Consolidation Loan to consolidate your parent PLUS loans. This will pave the way for your eligibility for both income-contingent repayment and Public Service Loan Forgiveness (PSLF).

Income-contingent repayment

This path to forgiveness extends your payment period from 10 to 25 years and puts a cap on your monthly payments in relation to your discretionary income. If you still have a balance left to pay after 25 years, it will be forgiven. You must consolidate your loans before you can use income-contingent repayment.

Although ICR could lower your monthly payments, you could end up paying more interest over time because your payment period is extended by 15 years.

Public Service Loan Forgiveness (PSLF)

Public Service Loan Forgiveness gets very complicated, no matter what type of loan you have. The requirements can be strict and the application process is confusing. You must first work full-time in a qualifying career and make on-time monthly loan payments for 10 years before it’s an option. Even then, 99% of applications for PSLF get turned down.

To be eligible, you must consolidate your parent PLUS loans first.

Student loan refinancing

Since parents usually have better and more established credit than their children, refinancing parent PLUS loans usually saves more than if your child refinanced their own loans. Creditors look for a good credit score and credit history, as well as a steady income, when they refinance loans at a lower rate. This can mean paying less interest over time.

However, if you do refinance with a private lender, this means giving up your ability to enroll in an income-contingent repayment plan or qualify for protections like deferment and forbearance.

Refinance in your child’s name

When your child graduates, finds a career, and becomes more established, you could refinance your parent PLUS loans in their name. Refinancing in your child’s name means that you are no longer responsible for the loans.

What you can’t do for parent PLUS loan repayment

Unfortunately, there are a couple programs parent PLUS borrowers aren’t eligible for. Although they can work with other types of federal student loans, Pay As You Earn (PAYE) and Income Based Repayment (IBR) can’t help you with parent PLUS loans unless you consolidate first.

You also can’t count on any kind of grace period. Some students can get up to 6 months of no payments after they graduate, but this doesn’t apply to parent PLUS loans.

Student loan interest tax deduction

When you pay parent PLUS loans, you may be eligible for a tax deduction. You can get up to $2,500 from the IRS based on your income and the interest you pay on your loans during the tax year. To qualify, you must:

  • Have an annual modified adjusted gross income of less than $80,000 or $160,000 if married filing jointly.
  • Not file as married filing separately.
  • Be legally obligated to pay interest on the loan.
  • Not be claimed as a dependent on anyone else’s tax return. If married filing jointly, this applies to your spouse as well.
  • At the time you borrowed the loan, the student was you, a dependent, or your spouse.
  • Have only used the loan for qualifying educational expenses (tuition, room and board, books, etc.).

What do parent PLUS loans mean for my retirement?

Retirement is a big reason that you should be careful when taking parent PLUS loans. If you’re stuck repaying loans for the next 25 years, it can vastly deplete the savings you were keeping for retirement – or prevent you from saving for retirement at all.

Even as you get closer to retirement, don’t think about borrowing against your retirement to pay off the loans. This can result in penalties for taking out the money early, not to mention less savings for you when you actually do retire.

Final thoughts

Unless you’re positive you have the means to easily repay your parent PLUS loans, it may be best to avoid borrowing them altogether. If you already have them, there are options that can help you pay less.

The bottom line is not to let parent PLUS loan repayment get in the way of your retirement.

Pay off your parent PLUS loans. Your retirement depends on it.

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Article last modified on November 11, 2019. Published by Debt.com, LLC