Picture this: Your child has graduated and moved on to a successful career. Meanwhile, your job is coming to a close, and retirement is around the corner. And yet, you still owe thousands of dollars for your child's education. Sound familiar? This scenario is a reality for many Americans who borrowed federal Direct PLUS Loans.
At the time, borrowing Parent PLUS Loans seemed like a good idea. But now that the high-interest rate has caused your loan balance to nearly double, taking on that student loan debt seems like one of the worst decisions you ever made.
As you near retirement, here's what you need to know about Parent PLUS Loan forgiveness and available repayment options.
What happens to Parent PLUS Loans when you retire?
Until that happens, you'll need to keep paying Parent PLUS Loans even after you retire and your income decreases. Of course, that can be challenging since you'll likely be living on a fixed income. But, there are options you can take to prepare for the change in your personal finances so you can enjoy your retirement years without worrying about Parent PLUS Loans.
Are there any Parent PLUS Loan forgiveness programs?
The federal government offers parent borrowers two primary paths towards loan forgiveness:
- Public Service Loan Forgiveness (PSLF) - forgives the loan balance tax-free for parents who work full-time for the government or a nonprofit after 10 years of monthly payments.
- Repayment Plan Forgiveness - wipes out your remaining balance after 25 years of qualifying payments under the income-contingent repayment plan.
In addition to those two programs, there are federal Parent PLUS Loan forgiveness options for permanent disability, fraud, identity theft, etc. However, those programs typically have narrow eligibility requirements that most parent borrowers won't meet.
3 Strategies for Paying Parent PLUS Loans in Retirement
1. Enroll in the ICR Plan
The U.S. Department of Education allows all student loan borrowers, including parents, the opportunity to get an affordable monthly payment based on their income and family size. Parent PLUS loans are eligible for the Income-Contingent Repayment (ICR), but only after the parent loans have been combined into a federal Direct Consolidation Loan.
Once consolidated, the loan servicer will cap your monthly payment at no more than 20% of your discretionary income. Many retirees who receive Social Security benefits and a small pension end up paying less than $100 per month regardless of their loan balance. Plus, their remaining loan amount will be forgiven after they make 300 qualifying payments (e.g., on-time and for the full amount due).
Choosing a payment plan before retirement. Before you retire, the ICR Plan may not be the best Parent PLUS Loan repayment option if you're seeking a lower payment amount. The Extended or Graduated repayment plan may offer you a more affordable payment until your income decreases.
2. Refinance with a private lender
Parent PLUS Loans often have interest rates 1-3% more than other federal student loans. Refinancing parent loans with a private lender could allow you to get a lower interest rate, which will help you get a lower monthly payment and pay the loans off faster.
To qualify, you'll need a good credit score (680+) and enough income to cover your monthly bills and other payments for education loans. Since there is an income requirement, explore refinancing Parent PLUS Loans before you retire and your income decreases.
Note: If you refinance with a private lender, you'll lose access to federal benefits like deferment, forbearance, and student loan forgiveness programs
3. Transfer Parent PLUS Loans into your child's name
If your child has good credit — a score that's at least in the 600's — and enough income to cover their expenses and debt payments, you may be able to transfer Parent PLUS Loans into their name with a private student loan refinance. Not all lenders allow this switch, but several do.
The benefit to you is obvious: you get free from the student debt, your child takes over the student loan payments, and you can start putting more money into retirement plans.
The tradeoff in refinancing is that the loans will lose protections like payment suspension during the pandemic, income-based repayment plans, and cancellation at death or disability.
Note: Refinancing may be an option even if your child doesn't have good credit and a low debt-to-income ratio. The lender may ask you to be a cosigner. Before you agree, know your cosigner rights.
Parent PLUS Loan Retirement FAQs
Should you withdraw your retirement funds early to pay Parent PLUS Loans?
Short answer — no! It's rarely a good idea to withdraw your retirement savings early — especially to pay off a debt that can be effectively managed with the right student loan repayment program. Before you borrow from your 401k or sell stocks, use the Federal Student Aid's Loan Simulator to estimate your payments under the different repayment plans.
Should you consider bankruptcy for Parent PLUS Loans?
Filing Parent PLUS Loan bankruptcy requires an additional proceeding called an adversary proceeding, and success is neither guaranteed nor typical. In most courts, you'll have to prove that repaying your student loan debt is causing you an undue hardship, and you've made a good-faith effort to repay your loans. Since the government offers income-based repayment plans and extended repayment terms, it's hard for many borrowers to provide sufficient proof.
Will Biden forgive Parent PLUS Loans?
If President Biden forgives federal student loans, Parent PLUS Loans that the Department of Education owns will likely be eligible. Keep in mind that the Department doesn't own all Parent PLUS Loans. If you borrowed loans for your child's education before 2011, you might have loans that a guaranty agency owns. These loans are sometimes referred to as commercial loans. These loans will be listed on your student account as Federal Family Education Loans (FFEL).
Retiring with Parent PLUS Loan debt? Let’s talk
You're not the only parent wondering how you’ll afford Parent PLUS Loans once you retire. I’ve helped parents and student loan borrowers devise strategies to keep them out of default, preserve their credit scores, and leave room in their budgets so they can live. Schedule a free 10-minute call to see how I can help you.
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