Parents who take out federal Parent Plus loans to help pay for their children’s college education typically don’t qualify for some breaks available to student borrowers themselves, like repayment options that take their income into account.
But Mark Kantrowitz, a financial aid expert, says there is a workaround available that may help some parents, especially those who are worried about being able to afford their Parent Plus loan payments as the parents near retirement. The approach involves refinancing the loans through a Federal Direct Consolidation Loan, which may make the debt eligible for more flexible repayment options, he wrote this week on his Web site Fastweb.com.
The approach may enable parents to reduce their monthly payments and stretch out the repayment period on the loan. And in some cases, borrowers may even have the debt forgiven.
The option is of interest, Mr. Kantrowitz said, because federal data suggests that some retirees are still paying off education debt, mostly likely loans taken out for their children, rather than for themselves.
Unlike federal loans taken out by students, Parent Plus loans aren’t usually eligible for income-based repayment, a plan that helps reduce payments for students who have low salaries and significant debt by figuring payments based on their income. The parents’ loans are also not eligible for income-contingent repayment, an earlier version of repayment help that’s calculated a bit differently.
But, Parent Plus loans can become eligible for the second version — income-contingent repayment — if they are refinanced into a Federal Direct Consolidation Loan. The consolidation loan helps the borrower manage debt by refinancing one or more loans into a new loan, resulting in just one, usually lower, monthly payment and extending payment over a longer period of time. (The interest rate on the new loan is based on an average of the rates on the loans that are consolidated, rounded up to the nearest one eighth of a percent.)
The consolidated loan is eligible for income-contingent repayment, which pegs monthly payments to the borrower’s income, family size and total amount borrowed. The consolidated loan can extended for up to 25 years, after which any balance is forgiven. It’s also discharged if the borrower dies.
Further, once the Parent Plus loan is consolidated, it can also benefit from public service forgiveness, a program that erases any remaining federal student debt after 10 years for borrowers who work in the government or the nonprofit sector. This may benefit borrowers who are employed in those areas and who have 10 years until retirement.
In a confusing conflict of rules, Parent Plus loans are technically eligible for public service debt forgiveness even without consolidation, Mr. Kantrowitz wrote. But, in practice, that doesn’t help much. Because the loans are not eligible on their own for income-related repayment plans, the loans are typically repaid over a standard 10-year repayment period, after which there’s no debt left to forgive.
Parent Plus loan borrowers can get information about consolidation loans through their loan’s servicer or from the Web site of the federal Education Department.
A calculator on Finaid.org, a site created by Mr. Kantrowitz, can help compare the difference between a standard repayment option and an income-contingent option.
Are you worried about paying off Parent Plus loans?
Written by Ann Carrns and published in the New York Times.