If you borrowed money in the form of a Parent PLUS loan to finance your child’s college education, you may be wondering what your options are for repaying the debt. The good news is that you have several different alternatives available to you.
Take Advantage of the Deferment Period
First of all, you may be wondering when you need to start repaying your Parent PLUS loan. By default, the U.S. Department of Education requires repayment on a Parent PLUS loan to begin as soon as the loan is fully disbursed. However, you may request repayment deferment while your child is still in school and for the customary six-month grace period following graduation. However, keep in mind that interest accrues during the entirety of the deferment period, and is capitalized (added to the principal amount that you actually borrowed) when repayment begins. As a result, when you do start to repay the debt, you will be paying interest on interest, in addition to interest on the original loan amount that you received.
Pro tip: For schools that require you to apply for Parent PLUS loans via StudentLoans.gov, you have the option to request repayment deferment during the initial loan application process.
When it is time to start repaying your Parent PLUS loans, you have several different options available to you, each described below.
Option #1: Standard Repayment Plan
You are automatically enrolled in the Standard Repayment Plan, which has a ten-year repayment term. If you can afford the monthly payments, this is a viable option for paying off the debt in a relatively short span of time with minimal interest expense.
Option #2: Graduated Repayment Plan
Another option is the Graduated Repayment Plan, which also has a ten-year repayment term. Monthly payments are lower at first and increase every two years, with monthly payment amounts never less than the amount of interest that accrues between payments and never greater than three times the initial monthly payment amount. While the Graduated Repayment Plan is a viable option for borrowers who expect to steadily earn more income over time, it accrues more interest overall than the Standard Repayment Plan.
Option #3: Extended Repayment Plan
The Extended Repayment Plan is available to borrowers with outstanding loan balances of more than $30,000. Monthly payments may be a fixed or graduated amount, and the loan term can be up to 25 years. Extended Repayment Plans offer lower monthly payments than the Standard or Graduated Repayment Plans; however, the extended repayment period results in higher interest costs paid over time.
Option #4: Direct Consolidation Loan Program
If you are repaying more than one Parent PLUS loan, then you may want to consider consolidating your loans. The Direct Consolidation Loan Program enables you to simplify the repayment process by combining multiple student loan debt installments into a single monthly payment. Consolidated loans have a fixed interest rate with flexible payment options. You can likely lower your monthly payment; however, this will almost always extend the overall length of the repayment term and result in higher total interest costs. In addition, when you consolidate your loans, by default you forfeit your right to any remaining deferment period, which normally extends until six months after the child’s graduation.
Pro tip: You have the option to indicate on the Direct Consolidation Loan application that you want the loan servicer to delay consolidation of your loans until near the end of the deferment period.
Option #5: Income-Contingent Repayment Plan
If you have consolidated your Parent PLUS loans under the Direct Consolidation Loan Program, then you may be eligible to enroll in an Income-Contingent Repayment (ICR) Plan. Under ICR Plans, your monthly loan payment is based on your annual income and family size. Monthly payments are limited to not more than 20 percent of your discretionary income, or the amount that you would be required pay on a fixed 12-year repayment schedule, whichever is less. Increases in your annual income can potentially result in higher monthly payments than would be required under a Standard Repayment Plan (although, in such a scenario, your net interest expense would be reduced). In addition, you are obligated to certify your income and family size on an annual basis, otherwise your required monthly loan payment will automatically revert to the amount due under the Standard Repayment Plan. ICR Plans offer loan forgiveness for any loan balance remaining after 25 years; however, you will be required to pay income tax on the forgiven amount in the year that the balance is forgiven.
Option #6: Refinancing with a Private Lender
You have the option of refinancing your PLUS loan with a private lender. The PLUS loan can be refinanced in your name or your child’s name [“can I transfer a Parent PLUS loan to my child?”]. The refinanced loan will likely have a lower interest rate, resulting in lower monthly payments. However, extension of the repayment term will result in a greater total interest expense paid over time. In addition, private loans do not feature any of the protections or flexible repayment options offered by the U.S. Department of Education for federal loans, such loan forgiveness, income-based repayment options, and financial hardship provisions such as deferment and forbearance.
Option #7: Public Service Loan Forgiveness Program
Parents who work full-time for the federal government or qualifying nonprofit organizations may qualify for student loan forgiveness under the Public Service Loan Forgiveness Program. This program forgives outstanding loan balances for qualifying borrowers who make 120 qualifying monthly payments, which generally means that loan balances remaining after after ten years are forgiven. Borrowers must be enrolled in an income-based repayment program, such as the ICR Plan described above (note: the ICR Plan is the only income-based repayment plan for which parent borrowers qualify). In addition, this loan forgiveness program does not require borrowers to pay any income tax on the forgiven amount.
Utilize the Repayment Estimator Tool
Need more specific information? The Federal Student Aid Office of the U.S. Department of Education provides a handy Repayment Estimator tool to compute your monthly payments under different repayment programs. Borrowers can utilize this tool to explore all the repayment options available to them.
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