How To Consolidate Parent PLUS Loans
Post-secondary tuition has been steadily increasing over the last several decades. In fact, tuition costs for the 1987-1988 school year came to $3,190 in inflation-adjusted dollars. Just 30 years later, tuition costs have risen nearly 215%, with the average yearly tuition cost coming in at $9,970.
To combat these ever-increasing tuition costs, parents have begun to take out loans to help fund their children's education.
What Is A Parent PLUS Loan
PLUS, an acronym for parent loan for undergraduate students, are lending products available to the parents of post-secondary students. This financing option helps them pay for their children's tuition costs. These funds are granted by the U.S. Department of Education (ED).
To qualify for this financing, the borrower's child must be enrolled in at least part-time studies in a post-secondary establishment that participates in the ED program.
These lending products have a fixed interest rate of 7.08% and are available on a 10-year term. However, recently, an extended payment plan has been made available that can increase the tenure to 25 years.
It’s important to note that this debt is the parent's full responsibility and can’t be transferred to the child, even if they have the economic means to pay off the outstanding balance. Like other financing options granted through the ED, borrowers who allow the debt to go into default may be subjected to wage garnishment on behalf of the Department of Education.
Pros And Cons Of Parents PLUS Loans
- High borrowing limits: PLUS offers higher amounts when compared to other student federal lending products. If they qualify, parents can borrow up to the entire cost of their children's education expenses
- Fixed interest rate: As the cycles of quantitative easing come to an end, economics and policymakers expect interest rates to begin climbing upwards. Parent PLUS lending products are fixed-rate, meaning the interest won’t increase even if the prime rate does
- Several payment plans available: This financing comes with both a standard and graduated payment plan option. Graduated, in this instance, means the payments start smaller and grow larger as the loan matures. This is in contrast to the standard payment plan, which has equal monthly payments throughout the entire tenure. Moreover, those who feel they can’t successfully pay off the debt within the standard 10-year term may increase the term length to 25 years
- Comes with an origination: Although many private student lending products don’t come with an origination fee, a federal parent PLUS loan does. As of now, the origination fee is 4.236% of the total balance
- No escape: These lending products can’t be done away with, even in bankruptcy. Failure to pay back the debt will have the government garnish wages or Social Security. Additionally, unlike other financing options, a PLUS loan can’t be forgiven even if one's child ends up being placed on total permanent disability
Parent PLUS Loan Consolidation
When looking to consolidate parent PLUS loans, borrowers are faced with two routes: federal or private consolidation.
- Federal consolidation: The Department of Education offers a Direct Consolidation Loan. This can be used to consolidate several of one's federal student arrears into a single payment. This program can help lower the monthly payments and may even make the debt eligible for forgiveness
- Private consolidation: Even though these lending products can’t be transferred to a child, it can be refinanced through a private lender. This option may be attractive to borrowers who have high credit scores, as they may be able to achieve interest rates lower than the standard 7.08% rate carried by the PLUS financing option
What Is Better? Federal Consolidation Or Private Refinancing
Determining what option is best depends largely on the financial situation of the borrower. If one's credit score is good enough to qualify for low-interest rates, refinancing is likely to be the better option. It’s also essential to keep in mind that refinancing will result in the borrower losing out on the possible forgiveness benefits available with a Direct Consolidation Loan.
Furthermore, one can always pursue additional refinancing should they need more time to pay off the PLUS balance. Those with lower than average credit scores who want to take advantage of income-driven repayment plans should consider consolidation.
The Bottom Line
PLUS lending products offer parents a way to finance their children’s post-secondary education at relatively decent interest rates. However, those in the position to do so should strongly consider taking advantage of lower rates by refinancing the loan through a private lender.