Should You Refinance a Parent Student Loan
Refinancing a parent student loan loan might be a good decision, but it relies on your specific situation and the kind of loan you hold. Refinancing a private parent loan differs from refinancing a federal Parent PLUS Loan, and each option involves unique considerations.
Start by asking yourself why you want to refinance. Are you hoping for a lower interest rate, smaller monthly payments, or both? Refinancing could help you reach these goals.
You may have a cosigner that you would like to release or maybe you would like to change the terms of your loan. We will provide insight into all aspects of refinancing parent student loans, from what it means and how it works to exploring if it's right for you or not.
What Is Refinancing Parent Student Loans
Refinancing your parent student loan debt can unlock numerous advantages. By consolidating various student loans into one new loan, you'll simplify your monthly payments and potentially reduce your financial burden. The terms of your new loan will be determined by your selected lender and your creditworthiness. Through refinancing, you have the opportunity to manage your debt more effectively and tailor your payments to better suit your budget.
The process of refinancing parent loans is similar to other types of debt refinancing. You have the option to explore different lenders and repayment terms to find the best plan for your situation. Keep in mind that you will need to apply and meet certain qualifications. You may also have the opportunity to include your own student loan debt along with private parent loans or federal parent PLUS loans. This can consolidate your payments into one and potentially lower the interest rate. In the long run, refinancing your parent student loan could save you money.
Types of Parent Student Loans You May Have
There are two types of parent student loans available Federal parent Direct PLUS loans and Private Parent Student Loans.
Parent Direct PLUS Loans: A loan offered by the federal government that allows you to borrow up to the full cost of attendance at your child’s school minus other financial aid received. These are typically the most popular parent loans available. Fixed rates are set by the federal law each year, meaning your interest rate will not change during the life of your loan. Parent PLUS loans don’t have strict credit requirements to qualify but you cannot have adverse credit history (a record of poor repayment history on one or more loans or credit cards), which is defined by the U.S. Department of Education. If you are denied, you do have an option to appeal based on extenuating circumstances or reapply with a credit worthy endorser. However, if you are ultimately denied, your child may be eligible to borrow Direct Unsubsidized Loans up to the annual loan limits for an independent undergraduate student.
Private Parent Loans: This type of loan is typically offered by banks and other lenders and may have lower interest rates and fees than Parent PLUS loans dependent on current market conditions. Most private lenders offer fixed or variable-rate loans.
Benefits of Refinancing Your Parent's Student Loan
Refinancing can be an excellent way of minimizing interest rates. By refinancing, you are essentially replacing an existing loan(s) with another that most likely has an interest rate that is lower and favorable terms than your current loan(s).
Depending on your creditworthiness and financial standing, refinancing may also provide access to additional funds by way of the new loan that could give you a much-needed financial boost. Ultimately, by taking the time to carefully analyze your options and properly research lenders or companies specializing in refinancing student loan debt, you can take control of debt.
Some benefits of refinancing your parent student loan could be:
1. Lower interest rate: If you have good to excellent credit or if your credit has improved since your first took out the loan and if market conditions are such that current rates are lower than your original loan, you may be able to reduce the interest charged by refinancing into a new loan at the lower rate.
2. The ability to refinance multiple loans: If you have multiple student loans, including parent student loans, refinancing can help you combine them into one loan with one monthly payment. This can make it easier to manage your finances and stay on top of your payments.
3. Change the loan term: Refinancing can allow you to lengthen your loan term to reduce your monthly payment. Though by doing this there may be an increase in the total amount of interest you pay overtime, it may make sense however, to preserve your credit and make the loan more affordable.
Or you may refinance to a shorter-term loan, which would result in higher monthly payments but would allow you to pay off the loan faster and save money on interest in the long run.
4. Release the cosigner: If you had a cosigner on your parent student loan, refinancing could allow you to release them from their obligation. This can be a good option if your credit score has improved since you first took out the loan.
Refinancing a parent student loan can be a good way to save money, simplify your payments, and get better loan terms. Take your time shopping around for the best rates and terms before making a decision that fits your needs.
Disadvantages of Refinancing Parent Student Loans
Refinancing a parent student loan can have several potential drawbacks depending on the type of loan and original terms. Here are some of the cons to consider:
1. Loss of Federal Loan Benefits: When you refinance a Direct PLUS loan for parents out of the federal program with a private lender, you will lose access to certain federal loan benefits and repayment options, such as graduated and extended payment plans, Public Student Loan Forgiveness, income contingent repayment.
If you have multiple Parent PLUS loans and want to consolidate to a single loan with a single payment, this is an option for you that would allow you stay in the federal program. You will maintain your benefits and reduce your payments to one payment, but you will not have the option to reduce your interest rate, it will likely stay about the same. Interest for a Direct Consolidation Loan will be the weighted average of the loans you are consolidating rounded up to the nearest 1/8th of a percent.
2. Limited Repayment Options: Private lenders may offer fewer repayment options than the federal government, which could make it harder for you to manage your loan payments.
3. Co-Signer Requirement: If you don't have a good credit score or strong financial history, some private lenders may require a co-signer to qualify for a student loan refinance. This could be an added burden on your family member or friend who agrees to co-sign for you.
What are Repayment Options for Federal Parent Direct PLUS Student Loans
There are 3 repayment options available for Federal Parent PLUS loans.
1. Standard repayment: This is the most common default repayment plan for parent PLUS student loans. It involves making fixed monthly payments over a 10-year period. This plan typically results in the lowest total interest paid over the life of the loan.
2. Graduated repayment: This plan starts with lower monthly payments that gradually increase over time. This can be a good option for parents who expect their income to increase over time. The repayment term will still be 10 years.
3. Extended repayment: This plan allows you to extend your repayment term to up to 25 years. This can result in lower monthly payments but may result in higher total interest paid over the life of the loan. You are required to have an outstanding balance of $30,000 in a specific student loan program, like Direct Loans.
4. Income-Contingent repayment: If you consolidate your Federal Parent PLUS Loan with a Direct Consolidation Loan, you may be eligible to repay that Direct Consolidation Loan with an income-contingent repayment plan. This type of repayment plan is based on your income and family size.
5. Direct Consolidation: While not technically a repayment plan, consolidating your loan under the federal program may allow you to qualify for a longer repayment term. Repayment terms for Direct Consolidation Loans may be up to 30 years depending on your total education loan debt. However, with a longer the repayment term you will have a smaller monthly payment but know that the total amount you will pay will be significantly higher due to interest costs over a longer period of time.
Private Student Loan Refinance: This is NOT a federal student loan repayment option, however, this is an option for a borrower. A borrower with a parent Direct PLUS Loan does have the option to refinance the loan with a private lender. If you choose to do this you will lose your federal repayment benefits, and you cannot undo the refinance. Once you refinance, your federal loan will be repaid based on the terms of the new private student loan refinance. Some borrowers find that repaying under a lower interest rate is far more beneficial to them than the flexible terms offered in the federal program. Every borrower’s situation is different and it’s important to evaluate all your options. It's important to note that these repayment options are for Federal Parent PLUS Loans only. See below for repayment options for Private Parent Loans.
What are Repayment Options for Private Parent Loans?
If you borrowed a private parent student loan, your repayment options will vary depending on the lender. Some may offer different repayment plans, including immediate repayment, interest-only payments while the student is in school, and deferred repayment until after the student graduates or drops below half-time enrollment.
Some lenders may also offer extended repayment terms, graduated repayment plans, or income-based repayment options but these options are rare.
It's also important to note that private loans don’t have the same borrower protections and repayment options as federal parent PLUS loans, so be sure to contact your lender directly to discuss your repayment options and determine which plan may be best for your financial situation. And remember, there is no way to consolidate or move your private loans into the federal student loan program.
Eligibility for Refinancing Parent Student Loans
To be eligible for refinancing parent student loans, you’ll need to meet certain requirements set by the lender. Some requirements may include having a good credit score, a stable income, and a history of responsible financial behavior. Keep in mind that if your credit falls short, some private lenders may require a co-signer to qualify for refinancing, so be prepared to provide this information if necessary.
A Parent Direct PLUS loan can be consolidated into a Direct Consolidation Loan in order to have the Income Contingent Repayment Plan option within the Federal program. To do this, parents should apply for the consolidation loan at studentloans.gov.
Eligibility for Consolidating a Federal Parent Direct PLUS loan into a Direct Consolidation Loan
If you decide to consolidate a Parent PLUS loan into a Direct Consolidation Loan so that you can be eligible for the income-contingent repayment plan, you’ll need to meet the following eligibility requirements:
1. You must have at least one Direct Loan or Federal Family Education Loan (FFEL) that can be combined.
2. You need to have made at least one payment on your Parent PLUS loan and be in the repayment stage.
3. You cannot have defaulted on your Parent PLUS loan.
4. You must complete the application process and agree to pay back the consolidation loan by signing a promissory note.
5. In certain cases, you may be eligible to consolidate one loan in the federal student loan program. For example, if you have a FFEL loan you may be eligible to consolidate into the Direct Loan program in order to take advantage of some repayment and forgiveness options. Discuss your options with your federal student loan servicer.
Remember, combining your loans can make it easier to pay them off and lower your monthly payment. However, it can also mean paying more in interest over a longer period if your loan term was extended. Combining your loans into a Direct Consolidation Loan will allow your loan to remain in the federal student loan program.
Refinancing with a private lender could result in losing certain federal benefits, such as payment plans based on your income and the prospect of loan forgiveness. Be sure to consider your options carefully before deciding.
How to Apply for Parent Student Loan Refinance
Applying to refinance a parent student loan with a private lender is relatively straightforward - many lenders now accept online applications which only require basic information such as name, address, and income details.
This information is then used to pre-qualify potential borrowers before they apply for a loan. However, be aware that larger loan amounts or unique financial circumstances may require additional application processes.
No matter what, it’s worth noting that the time it takes to see savings from refinancing parent student loans will depend on a variety of factors, such as the interest rate on your existing loan, the interest rate on your new loan, and the length of your loan term.
With careful research and consideration, refinancing can be a powerful tool to help you manage your student loan debt and achieve your financial goals.
