#1 Student Loan Lawyer
Updated on March 15, 2023
The government doesn’t forgive Parent PLUS Loans when you retire or draw Social Security benefits, but it has programs that will wipe out your remaining balance after you’ve made a number of student loan payments under an income-driven repayment plan.
Picture this: Your daughter has graduated and moved on to a successful career. As your job winds down, instead of looking forward to retirement, you’re trying to figure out how much longer you’ll need to work to pay back the money you borrowed to pay for your kid’s college education. Sound familiar? This is an everyday situation for many Americans.
Parent PLUS Loans aren’t automatically forgiven when you reach retirement age, but you can get up to $20 thousand wiped out through President Biden’s debt cancellation plan. The rest can be erased after a decade of work in public service or after you’ve made 20 years’ worth of payments under the income-contingent repayment plan.
Ahead, learn what happens to your parent loans when you retire and how to get the balance forgiven.
What happens to Parent PLUS Loans when you retire?
The Education Department doesn’t forgive loan balances for parents when they retire. It will keep sending bills and adding interest until you pay off the debt, die or become totally and permanently disabled, or qualify for one of the department’s student loan forgiveness programs.
Related: Are Parent PLUS Loans Forgiven at Death?
Your monthly payment will stay the same even though you may bring less money home. The thought of that can be frightening if you’ve been paying hundreds of dollars each month. Doing the math, it’s clear that your retirement savings would be depleted faster than planned if your payments remain high.
Thankfully, there’s a way out.
The federal government lets parents get a payment amount tied to their income instead of basing the payments on their balance and interest rate. This income-contingent repayment plan caps monthly payments at no more than 20% of your discretionary income — i.e., the difference between your annual taxable income and 100 percent of the poverty guideline for your family size and state of residence. If your only source of cash comes from Social Security benefits, it’s possible your payment could drop to zero.
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.
Learn More: How to Protect 401k and Retirement Savings From Student Loans
Is bankruptcy an option?
Filing Parent PLUS Loan bankruptcy requires an additional proceeding called an adversary proceeding, and success is neither guaranteed nor typical. In most courts, you must prove that repaying your student loan debt is causing you undue hardship and that 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 enough proof.
Changing plans can lead to debt relief
The ICR plan has another hidden benefit: it forgives parent borrowers’ remaining balance after they’ve made 25 years’ worth of qualifying payments.
Waiting a quarter of a century to be free of your child’s educational debt can be a heavy load to bear, particularly when you’re well into your sixties and have endured years of financial strain due to this burden. But relief is probably a lot closer.
Earlier this year, U.S. Department of Education Secretary Miguel Cardona revealed that the department is in the process of reviewing borrowers’ accounts to give them credit toward income-driven repayment plan forgiveness. This one-time opportunity bends the rules on the types of payments that count for relief. It also credits borrowers for time spent in certain deferments and forbearances.
The department plans to finish its review process before payments resume next summer. Borrowers should be able to check their accounts on StudentAid.gov to see details on how many payments they have remaining before the loans are forgiven. Read more about the IDR Waiver.
How to change plans
Unfortunately, switching to the ICR plan isn’t as simple as contacting your student loan servicer and asking to change repayment plans. To qualify, you must first consolidate your loans into a Direct Consolidation Loan. You can do that for free on the Federal Student Aid website, StudentAid.gov.
Related: What is Student Loan Consolidation?
“8.4 million borrowers age 50 and older hold 22% of the total federal student debt load, amounting to $336.1 billion, according to an AARP study from 2020. ”
Drawbacks of switching to an income-based plan
While the ICR plan can make student loan payments more affordable, it has three potential drawbacks. First, you’ll pay more interest over time. The ICR plan stretches your repayment term from 10 to 25 years, and it may lower your payment to where it no longer covers the daily interest added to the balance. These two factors combined may result in you paying more interest under this plan.
Second, if you still have debt left after you’ve made your final qualifying payment, you may owe taxes on the forgiven loan amount unless you qualify for Public Service Loan Forgiveness. But if you qualify for forgiveness before the end of 2025, the American Rescue Plan includes a temporary waiver for tax-free loan forgiveness.
Finally, your spouse’s income may be considered when calculating your payment amount if you’re married. By filing your taxes separately, you can avoid having your joint income considered. That decision may be less than ideal if it results in a higher tax bill. However, if your spouse refuses to sign the request form for your student loan repayment plan, you may be able to file jointly and have only your income considered when calculating your payment amount. Read more about filing jointly and the ICR plan.
Other ways to get a lower bill
The ICR plan doesn’t work as well if you get a sizeable pension payment each month. Your payment may still be too high. If that repayment option isn’t best for you, look into the Extended Repayment or Graduated Repayment Plans. Those plans lower your payments by stretching your repayment term over a longer period.
Another way you could pay less is by refinancing your loans with a private lender. Depending on your credit score, you might be able to snag a lower interest rate.
Keep in mind that private student loan refinancing isn’t without risk. When you refinance federal student loans with a private lender, you lose access to income-based repayment options, loan forgiveness programs, and other protections. But if you’re comfortable giving up those benefits and have strong credit and steady income, or a cosigner with both, refinancing may make your payments more manageable.
Use an online marketplace like Credible to find the best student loan refinance lender.
Finally, you can try to put the loans in your child’s name or transfer them to your spouse. But that requires their willingness to take on the debt and them demonstrating to a lender that their personal finances let them cover their expenses and the student loan payment.
Parent PLUS Loans can be forgiven when you retire
Parent PLUS Loan borrowers can have their debt forgiven after 10 years of working full-time for the government, nonprofit, or other qualifying employers. For the past year, retired public servants could submit an application to get retroactive credit towards the Public Service Loan Forgiveness Program. But the PSLF Waiver ended on Halloween. Now, if you want to get your loans forgiven, you must continue working in public service until you’ve met the eligibility requirements.
Related: Will Parent PLUS Loans Be Included in Student Loan Forgiveness?
If you’ve already retired or don’t work in public service, you have two other options to get relief: IDR forgiveness and forgiveness due to disability.
As I shared above, the government is in the process of reviewing federal student loan borrowers’ accounts to give them retroactive credit toward IDR forgiveness. It plans to finish that review by July 1, 2023.
Related: Student Loan Forgiveness for Social Security Recipients
If you borrowed Direct PLUS Loans to cover your children’s college costs, you don’t need to do anything to receive this benefit. The department will review your account automatically. But if your kids went to school before 2011, you may have loans made through the Federal Family Education Loan Program. If you do, you may need to consolidate those loans into a Direct Consolidation Loan before May 1, 2023, to qualify. Read more about converting FFEL Loans to Direct Loans.
The Education Department will write off your balance if you suffer a permanent mental or physical disability that leaves you unable to work. You can still qualify for a disability discharge even if you’re already retired. To apply, you’ll need to submit a letter from your doctor or the Social Security Administration supporting your claim.
Related: What Disabilities Qualify for Student Loan Forgiveness?
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 have ever made.
Thankfully, there’s a way out. Not only can you get a lower monthly payment with the income-contingent repayment plan, but you can take advantage of different forgiveness options the government offers parent borrowers.
Let’s talk if you want help exploring different strategies to tackle your loans. I’ve helped thousands of parents and families find a plan that lets them retire without worrying about how they will afford their payments.
Related: Parent PLUS Loan Forgiveness