It’s noble to help your kids pay for college, but it’s not always easy. Or affordable.
That’s especially true if you borrowed direct Parent Loans for Undergraduate Students, also known as PLUS loans, to cover part of your child’s college costs. These federal loans come with high interest rates and fees.
But there’s a way to ease the burden of repayment once your child graduates: student loan refinancing. There are two methods of refinancing a PLUS loan:
- You, the parent borrower, can refinance the loan in your name.
- Your child can refinance the loan in his or her name and take on the repayment responsibility.
You or your child will lose some borrower protections by refinancing, and your child must be financially secure enough to qualify solo.
Here’s how to refinance or transfer parent PLUS loans, and what to weigh as you come up with an action plan.
Option No. 1: Refinance a parent PLUS loan in your name
PLUS loan interest rates are set by Congress, and they’re typically higher than the rates on other federal student loans. Refinancing with a private lender gives you the opportunity to carry your loan at a lower rate while you pay it off.
Parents and grad students who borrowed PLUS loans for the 2015-16 school year pay 6.84% in interest, compared to 4.29% on direct loans for undergrads. Historical PLUS interest rates are even higher: Parents who borrowed between 2006 and 2013 pay 7.9%.
Refinancing lenders offer interest rates based on your credit score, so parents with long employment and credit histories often qualify for lower rates. Variable rates start at 1.9% and fixed rates start at 3.74% on the refinancing marketplace Credible, for instance, which includes a 0.25% rate reduction when you sign up for automatic payments. (Note that variable rates will start to increase if and when the Federal Reserve raises interest rates.)
Option No. 2: Your child refinances a parent PLUS loan in his or her name
The government doesn’t give parents the option to officially shift PLUS loans into their child’s name. After graduation (and once they have the means), some grads give their parent the amount of the loan bill each month or log in to their parent’s online loan servicerportal to make the payment. But parents are still responsible for the debt.
A growing number of refinancing lenders allow graduates to refinance their parents’ loans — perhaps as part of refinancing their own loans — including Citizens Bank, CommonBond, Darien Rowayton Bank and SoFi. When a child applies for a new, refinanced loan, the lender pays off the prior balances and replaces them with a private loan. A child can include a parent’s PLUS loan in that bundle, which means he or she will then be on the hook to pay it back.
“Transferring a parent PLUS loan from parent to child can be very beneficial, as it releases the parent from the debt obligation and helps the child build his or her credit history by making on-time payments,” says Phil DeGisi, vice president of marketing at CommonBond.
Refinancing requires a credit score in the high 600s or above, solid employment history and an income of at least $24,000 a year in most cases. Graduates have to meet those prerequisites to apply, and the more favorable their financial profile the lower the interest rate they’ll get. A child can also include a parent as a co-signer on a refinanced loan, which may help him or her qualify or get a lower interest rate. In fact, Citizens Bank requires a parent to co-sign if a child refinances a parent PLUS loan.
A few considerations
Parent PLUS loans don’t have all the same benefits as other federal loan types, but you’ll still lose access to some protections by refinancing. They include flexible repayment plans, student loan forgiveness and payment postponement options like defermentand forbearance.
Through these federal programs, parents can pause loan payments for up to three years if they lose their jobs or experience another financial hardship. Many refinancing lenders offer hardship deferment, but for a shorter time.
If you’re ready to refinance
If you’re ready to refinance, fill out the short form here to see how much you could save by refinancing through NerdWallet’s partner Credible. You’ll then complete a longer form on Credible’s website, where you’ll see personalized loan offers from up to nine lenders.
Nerd note: Of the lenders on the platform, only Citizens Bank and CommonBond give children the option to refinance a parent PLUS loan. (Citizens Bank requires a parent to co-sign the new, refinanced loan.) Keep that in mind when it’s time to pick the lender that’s best for you.
This article first appeared in NerdWallet.