Options for Repaying Parent PLUS Loans
Parents who take out student loans on behalf of their children have many repayment options that they can choose from. Here's what you need to know.
Table of Contents
- Parent PLUS Repayment Options
- Refinancing Parent PLUS Loans
- Final Thoughts
The Parent PLUS Loan tends to be the ideal option for students who have exhausted their student aid and have no other alternative funding, or ability, to lower the cost of their education. When it comes to repayment, parent borrowers need to start paying back the loan 60 days after the student loan is disbursed or six months after their child graduates after having been enrolled on less than a full-time basis. Because the Parent PLUS loan attracts high interest, a parent might have to choose between making interest-only payments or having the interest amount added to their loan principal, which has to be paid back after the grace period. If you are a parent in this position and are looking for ways to help manage payments, read on as we highlight the options available to help you pay off your Parent PLUS loan.
Parent PLUS Repayment Options
Both student and parent borrowers have various loan repayment options availed to them by the Federal government. The repayment plans are based on the loan amount, current financial standing, or the type of student loan you have. Consider any one of the following options to help you make the best decision for your financial situation.
Standard Repayment Plan
Under the Standard Repayment Plan, loan payments remain the same for a 10-year repayment term. Both parent and student borrowers are automatically enrolled under this repayment plan. The Standard Repayment Plan has the highest monthly payment and the lowest total payment over the lifespan of the Parent PLUS loan.
Pros of Standard Repayment Plan
- High monthly payments mean you finish paying off your loan quicker
- Saves you money since it charges the lowest total payments compared with the other plans
- Payments will never change
Cons of Standard Repayment Plan
- High monthly payments may be strenuous to keep up with
- Does not qualify for loan forgiveness
Graduated Repayment Plan
The Graduated Repayment Plan is an option that allows you to start making lower initial loan payments that increase gradually every two years. Initial payments only cover the interest charged on your Parent PLUS loan. The gradual increase in loan payments should never be more than three times the initial loan payment. The repayment terms range from 10–30 years.
Pros of Graduated Repayment Plan
- Best for borrowers anticipating an increase in income
- Starts with a lower payment equal to entry-level salaries
Cons of Graduated Repayment Plan
- Increase in payments may strain borrowers with the same salaries as when they started paying off the loan
- Accrues more interest compared to the standard repayment
Extended Repayment Plan
Another available option to pay off your Parent PLUS loan is the Extended Repayment Plan, which has a fixed amount of payment. The monthly payments under this plan are lower and the repayment term is longer up to 25 years. The total interest paid is greater than that of the Standard Repayment plan, and the monthly payments can be either a fixed or graduated amount.
Pros of the Extended Repayment Plan
- Offers lower monthly payments compared to the standard and graduated plan
- Offers two options: fixed or graduated options
- Best for borrowers with loan balances of more than $30,000
Cons of the Extended Repayment Plan
- Has a higher interest rate cost paid over the lifespan of the loan
- No loan forgiveness
Income-Contingent Repayment Plan
In order for your Parent PLUS loan to qualify for the Income-Contingent Repayment (ICR) Plan, you have to turn your loan into a federal direct consolidation loan. Under this plan, the monthly payment is based on your income and is set at 20% of your discretionary income.
Pros of Income-Contingent Repayment Plan
- After 25 years loan balance is forgiven under this plan
- Offers a good alternative for parents struggling with the standard repayment plan
Cons of Income-Contingent Repayment Plan
- You end up paying more interest
- Might be required to pay income tax on any amount that is forgiven
Income-Based Repayment Plan
The Income-Based Repayment Plan (IBR) bases your monthly payment on your income. This is a good alternative for Parent PLUS loan borrowers who are expected to make monthly payments that are higher than their income. There are four repayment options under this plan: Income-Contingent, Income-Based, Pay As You Earn, and Revised Pay As You Earn.
Pros of IBR
- Loan is forgiven after 25 years
- Provides flexibility on loan payments as it depends on your income
Cons of IBR
- Loan forgiven after 25 years may be taxed
- Total loan balance can continue to increase
Pay As You Earn Repayment Plan
The Pay As You Earn (PAYE) Repayment Plan is an income-based system for loan repayments. PAYE bases payments on your income rather than on a fixed amount, so this plan is ideal for borrowers who do not earn enough to pay their debt without making them go through financial hardships. The debt payment is reduced to 10% of your discretionary income.
Pros of PAYE
- Debt is forgiven after 20 years
- Has lower monthly payments
- Under this plan, you might receive an interest subsidy on your loan if monthly payments are not enough to cover interest (for subsidized loans)
Cons of PAYE
- Has stringent eligibility requirements
- Forgiven balance is taxed
Public Service Loan Forgiveness
The Public Service Loan Forgiveness (PSLF) was introduced by the Federal government as a program to encourage students to pursue careers in public service in positions in government or not-for-profit organizations. This option can help Parent PLUS loan borrowers provided that they make 120 qualifying payments under the income-driven or standard repayment plan. Once this is done, students with federal Direct loans, such as the Parent PLUS loan, can have the remainder of their loan balance forgiven.
- Work full-time for a qualifying employer
- Have a federal Direct student loan or consolidate the other types of federal student loans that you might be having
- Make 120 regular and on-time payments
- Be enrolled in the income-driven repayment plan
Pros of PSLF
- You get out of debt quickly
- The forgiven amount is not taxable
- Your income can be channeled to other personal and financial goals
Cons of PSLF
- Has strict qualifying criteria
- The job opportunities are limited
Refinancing Parent PLUS Loans
Besides the repayment programs available, another way to help repay your Parent PLUS loan is to refinance it. Refinancing a Parent PLUS Loan entails you taking out a new loan from a private lender to pay off your federal loan. The new loan is what you will strive to repay. Refinancing your Parent PLUS loan can help to lower the interest rate, as the rate charged has the potential to be half of what you are currently being charged on your Parent PLUS loan.
Conditions for Refinancing Parent PLUS Loans
- Have a strong credit score
- Have a co-signer
- Loan should not be in default
Pros of Refinancing Parent PLUS Loans
- You can transfer the loan to your child
- Saves money by lowering the interest rate
- Reduces the number of monthly payments for borrowers with more than one federal student loan
- Lowers the monthly payments
Cons of Refinancing Parent PLUS Loans
- Unable to access student loan forgiveness programs
- Cannot be enrolled under the income-driven repayment plan
- Disqualifies you from federal deferment and forbearance options
Here are some frequently asked questions.
What are the repayment options for parent PLUS loans?
The repayment options for parent PLUS loans are the Standard, Extended, and Graduated Repayment Plans. Parents can consolidate their loan into a Direct Consolidation Loan to be eligible for the Income-Contingent Repayment plan.
Will there be loan forgiveness for Parent PLUS loans?
Yes, there will be loan forgiveness for Parent PLUS loans if you make 120 qualifying payments which are approximately ten years. The parent PLUS loan is eligible if it is a Direct Loan or a federal Direct Consolidation loan.
How do I consolidate Parent PLUS loans?
There are two options to consolidate your loan; Federal consolidation- you apply for a federal Direct Consolidation loan and this consolidated loan pays off your Parent PLUS loan, and; Student Loan Refinancing- take out a new loan from a private lender to pay off your existing Parent PLUS loan.
Parent PLUS loans need to be either Direct loans or Direct Consolidation Loans in order to access all these repayment options. When factoring in repayment options for your Parent PLUS loan, loan forgiveness is an important aspect to be considered. Having said that, it’s important to note that loan forgiveness may be difficult to get since only a small percentage of the applicants receive this benefit, so make sure you review all the options available. Depending on your financial situation, life goals, the need to qualify for loan forgiveness, or the length of your loan term, there is a repayment plan that can suit your financial needs.