The question of whether you can transfer your Parent PLUS Loans to your child is a common one…with a complicated answer. This article will guide you through your options, as well as give you some important things to think about.
Reasons for Transferring Parent PLUS Loans to Your Child
There are several reasons to consider transferring your Parent PLUS Loans to your child. For starters, you may want to get rid of your recurring monthly payment and lower your overall debt. You may even have another dependent student who needs help paying for college. On top of that, some parents may have an understanding with their kids that they will help with initial college costs, but they expect their children to assume more responsibility once they graduate and start earning money. Whatever the case may be, transferring your Parent PLUS Loans needs to happen formally.
Student Loan Refinancing
Student loan refinancing is the only way to ‘transfer’ a Parent PLUS Loan to your child. Your son or daughter will need to qualify for refinancing based on their creditworthiness, and find a private lender that allows a parent loan transfer. There are several steps involved in the application process to achieve this.
Private Lender
The following lenders offer student loan refinancing.
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Refinancing Application
Your child would be the primary borrower on the refinancing application, but he or she can add a cosigner (such as a spouse) if needed. Here are the basic steps of the process:
- Initiate the application. Your son or daughter will submit a loan application and show proof of income and pass a credit check.
- Include the Parent PLUS Loans. The lender will ask which loans should be included in the refinance. The Parent PLUS Loans can be added but it should be noted that these loans are in your name, as opposed to your child’s name.
- Loans are paid in full. The refinance lender will send payments to each of the loan servicers to pay off the loans, including your Parent PLUS Loans. You need to continue to making monthly payments until you receive confirmation that the loans are paid in full.
Federal Student Loans
Federal student loans, including Parent PLUS Loans, are eligible to be refinanced with a private lender. It’s simply a matter of finding a lender that allows parent loans to be transferred to your child. You cannot transfer loans in the federal program.
Federal Benefits
It’s important to note that refinancing student loans will impact federal benefits. Specifically, once federal loans are refinanced they lose protections, including:
- Deferment and forbearance options
- Loan forgiveness, including Public Service Loan Forgiveness (PSLF)
- Income driven repayment plans
Refinance Parent PLUS Loans
Some parents may choose an alternate solution—to refinance their Parent PLUS Loans to achieve better terms. This could include a lower interest rate and lower monthly payment. Some parents do this as an interim step to grant more time for their son or daughter to build up their credit profile until they can qualify for a student loan refinance on their own.
Credit Scores
The minimum qualifying credit score for a refinanced loan will vary by lender. But lenders typically look for a minimum FICO® Score in the high 600’s. On top of a strong credit score, borrowers should also have proof of steady and sufficient income.
Debt to Income Ratios
Lenders evaluate debt-to-income (DTI) ratio as part of the approval process. Simply put, the DTI ratio is the percentage of your total monthly debt against your gross monthly income. It can be calculated in this way:
- Total monthly payments / Gross monthly income
Lenders do not always disclose what their requirements are, but the lower your DTI the better…with a standard of excellence being 30% or lower.
The DTI ratio is important in deciding if—or how much of—your Parent PLUS Loans should be transferred to your child; especially when considering how much other student loan debt may be included.
Interest Rate
Competitive interest rates are something to look for when refinancing parent and student loans. Most lenders use the 30-day average Secured Overnight Financing Rate (SOFR) plus a margin. In today’s market, you can expect to see advertised rates around 4.7% to 9%.
Loan Terms and Conditions
Many private lenders offer flexible loan terms and conditions, depending on your credit history and total loan balance. Here are some things to look for (or help your son or daughter choose) when shopping for the best student loan refinance:
- Interest Rates – These can be fixed or variable. Interest rates can be dramatically different, so it is important to compare them carefully.
- Loan Fees – Loan fees may be called origination fees, application fees, or even late fees. While most lenders do not charge upfront fees, policies may vary when it comes to late fees.
- Length of Repayment – Lenders may offer repayment terms ranging from 5 years to 20 years. Longer repayment terms help reduce the monthly payment amount but result in higher overall costs.
- Hardship Forbearance – Some lenders may offer a temporary forbearance, others will not. Unlike federal loans, a deferment or forbearance is an optional benefit for private lenders to offer.
- Prepayment Penalties – Most private lenders do not charge prepayment penalties for early repayment.
Loan Payments
The loan payments on a refinanced loan will depend on the total loan balance, the number of years for repayment, and the interest rate. As stated previously, if you are transferring your Parent PLUS Loans to your child, you will want to continue making monthly payments until you receive confirmation for your loan servicer that your loans have been paid in full.
Private Student Loans | Cosigner Release
Student loan refinancing may not be the only option when it comes to transferring private student loans. If you cosigned a loan with your son or daughter, find out if your lender offers a cosigner release option. After making a series of on-time payments (anywhere from 12 months to 48 months), your child can request to release you from the loan, subject to lender credit review. This can be a straightforward way to remove the debt obligation from your credit report, as well as improve your DTI ratio.