With the cost of college increasing every year, students and their parents tend to take out government loans in order to help cover the cost of college. As the parent of a current or former college student, you may have had to borrow loans through the Federal Parent PLUS lending program. If you are like many other parents who borrowed from this program, you may wonder whether it is possible to refinance Parent PLUS loans.
If you've asked this question, you are likely ahead of the game when it comes to repaying your loans. It shows that you are thinking of how to pay off your parent PLUS loans in the shortest amount of time and with the least interest. You will likely be pleased to know that the answer is yes, parent PLUS loans can be refinanced! In fact, there are several different ways to refinance these loans. The best way for you depends on your unique financial circumstances.
Refinancing your parent PLUS loans can be helpful under a variety of circumstances. The first is if you are looking to save money on your interest rate. Parent PLUS loans that were dispersed between 2006 and 2013 have an interest rate of 7.9%. The interest rate for the same loans that were dispersed between 2015 and 2016 decreased slightly, to 6.84% interest. However, parents who refinance these loans can typically receive a much lower rate. This is particularly true if you have a good to excellent credit score. In fact, a fixed interest rate loan can start at under 4% while a variable interest rate loan can start at under 2%. This can save you thousands of dollars in interest during the life of your loan.
A second reason why refinancing may be helpful is if you are looking to transfer the parent PLUS loan to your child’s name. Since this is not permitted by our government lender, parents can opt to refinance, as some lenders (i.e., SoFI, CommonBond, etc.) permit the college student to refinance the parent PLUS loans in their name. This enables your child to build a stronger credit history and permits the parent to have more financial freedom during their later years. In order to refinance the parent loans though, the student must earn a minimum salary (which varies by lender) and have a good credit score.
A third reason some borrowers choose to refinance is to have only one payment, instead of multiple payments each month.
Regardless of whether you are looking to refinance the loans in your name or transfer them to your child’s name, there are a number of different options available to refinance these loans. Like many things in life, each different option has some advantages and disadvantages. Thus, the best option for you may depend on your unique situation, credit score, and other factors. Below are some of the options that you may wish to consider:
Use a Home Equity Line of Credit to Refinance Parent PLUS Loans
Some parents opt to refinance their loans using a HELOC (Home Equity Line of Credit). This option permits users to leverage the value of their home (or home equity) as a guarantee that the loan will be repaid. As such, borrowers may find that they can qualify for a lower interest rate. In fact, the lower interest rate is the main advantage of refinancing loans in this fashion. However, there is a risk that you could lose your home if you do not repay the loan. Refinancing through this method also means that you give up the defferal and forbearance options offered by the government lenders.
Use a Private Student Loan to Refinance Parent PLUS Loans
By opting to refinance Parent PLUS loans through a private lender, you could save a large amount of money on the interest rate. This route is ideally suited for borrowers with a strong credit score and a stable job that pays well. If you meet those basic criteria, you should be able to save a couple of percentage points on your loan. While it may not seem like much, depending on the amount of the original loan, it could save hundreds to thousands of dollars in interest on the remaining life of the loan.
Many families choose to refinance through a private loan company so the student can take on the burden of the loans, by having the Parent PLUS loans transferred to his or her name. This situation is ideal for students who may now be earning more than their parents, for parents who are retired and unable to make hefty loan payments, or parents who need to free up their credit. Only some banks allow parents to transfer the Parent PLUS loan to their child.
The main disadvantage with refinancing through a private student loan lender is that the new loan will not be eligible for certain protections which are afforded to government loans. For example, in the case of Parent PLUS loans, there are certain times when the borrower can apply for a deferral or forbearance while the loan is serviced by the government. However, once the loan is refinanced, the borrower loses these privileges. Some lenders may have their own similar programs in case of dire hardship. However, it is up to the borrower to find out about these policies prior to refinancing as some lenders may not offer this at all.
Other Options to Refinance Parent PLUS Loans
In fewer cases, parents may opt to refinance their loans using an installment loan or an unsecured line of credit. These two methods are used less often because they require excellent credit in order to qualify.
If you opt to refinance your Parent PLUS loans, be sure to research various options. Some private lenders offer a variety of repayment terms (i.e., 5, 7, 10 years) and others offer fewer choices. Some companies also have added perks, such as no origination fee on the loan and a savings of 0.25% if you sign up for autopay. Doing some research will help you find the best refinancing option for your family.