Regarding student loans, 20 and 30 year olds University graduates are not the only population affected.
Parents are just as likely to overborrow as their children—perhaps more.
While dependent undergraduates can borrow a maximum of $31,000 in subsidized and unsubsidized student loans, parents can afford up to the cost of tuition – less any other assistance received – in Parent PLUS Loans.
And that can add up quickly. More than 3 million Parent PLUS borrowers owe nearly $62 billion, or about $20,000 per borrower, according to Department of Education data.
For these borrowing parents, “their prime earning years have since passed in most cases,” says John Collins, managing director of GL Advisor, a financial advisory firm for advanced-level professionals with student loan debt. And their repayment options are limited.
For example, mom and dad may want to transfer the PLUS loan to Junior after he graduates. After all, it’s his degree and his debt, right?
“Parent PLUS loans cannot be transferred from parent to child, nor can they be combined with federal student loans by consolidation,” said Jan Miller, president of Miller Student Loan Consulting, in an email.
But while parents can’t pass the debt on to their children, they have other options for managing it. Here are four.
1. Consolidate to gain plan eligibility based on income: Income-contingent reimbursement, an earlier and less generous version of the Pay as you earn and income-based repayment plans may be an option for parents consolidating their Parent PLUS loans, experts say.
Borrowers paying on the income-contingent repayment plan pay 20% of their discretionary income for up to 25 years. And, unlike IBR and Pay As You Earn, borrowers don’t need to meet income requirements to be eligible for the plan. But the biggest benefit comes from having a high debt-to-income ratio.
Even parents with just one loan can consolidate it so it’s eligible for income-contingent repayment, Miller says.
“So if you only have one Parent PLUS loan, and no other loans in your name, you can always consolidate that loan so that it is no longer a Parent PLUS loan, but a consolidated loan”, specifies- he.
Like their children, parents can also repay student loans through the standard 10-year plan, the extended repayment, and the phased plan, which steadily increases the borrower’s monthly bill, usually every two years.
2. Consider canceling government loans: Parents in skilled jobs in government and non-profit organizations may be eligible for forgiveness of public service debtwhich cancels the remaining debt, tax-free, after 120 one-time payments.
Parents on the standard 10-year plan will have nothing to forgive after 10 years of payments. But those on the income-contingent scheme may be able to see a certain amount erased by the government.
Something aging parents should keep in mind, Collins says, is that they may not want — or be able — to work for another decade.
3. Refinancing can be an option, with risks: Parents may be able to refinance through a private group.
“In my opinion, parents are good candidates for refinancing,” says Andrew Josuweit, CEO of Student Loan Hero, an online platform that helps students manage their loans. “The chances of being approved are quite high.”
They might find that the refinance lowers their interest rate. Parent PLUS loans currently carry a rate of 7.21%. At Citizens Bank, which offers the possibility to Parent PLUS borrowers, for example, a refinanced loan fixed rates can go down to 4.74% while variable rates start at 2.31%.
But there is a trade-off with refinancing private loans. “Refinancing leaves you without the protection of federal government programs,” Collins says.
These include deferment and cancellation of public service loans, Miller says.
And that’s not a strategy for parents who are struggling to repay their PLUS loans. “It’s really hard to get approved,” he says.
4. Review the overall financial picture: Borrowing parents are very different from borrowing students and have different strengths and concerns.
They may be close to retirement, which can be a difficult financial balancing act.
In 2013, 17% of Parent PLUS loans held by borrowers aged 65 to 74 were in default, according to a report of the Office of Government Accountability.
Parents must balance the repayment with their retirement accounts and other obligations. “This is one where potential families should really look at how this thing is going to affect the whole family down the road,” Collins says.
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