I often tell people that my student loans really sucked. I usually qualify that statement with the fact that this was a Federal Parent PLUS Loan.
In this post, we’ll take a look at how to make your Federal Parent PLUS Loan less painful.
What is a Federal Parent PLUS Loan?
In short, a Federal Parent PLUS Loan is a loan in a parent’s name. In other words, although the loan funds the student’s education, the parent is considered the borrower.
To be more specific, Edvisors summarizes them as such:
The Parent PLUS Loan is a federal student loan available to the parents of dependent undergraduate students. The Parent PLUS Loan offers a fixed 7.6% interest rate for the 2018-2019 school year and flexible loan limits. To be eligible, a parent can’t have an adverse credit history. Parent PLUS Loans have a 4.248% origination fee for loans first disbursed on or after Oct. 1, 2018 and before Oct. 1, 2019.
Just by glancing at the above, these loans already don’t seem great. “But wait!” you might be thinking. “There must be something redeeming about them.”
And you are correct…somewhat. Student Loan Hero has this covered so I won’t regurgitate everything they’ve already said. I do want to call out one thing I found a little funny, though.
A Pro? Or a Con?
The first pro in the Student Loan Hero article I mentioned is that you can borrow as much as you want. To me, this is as much a con as it is a pro; in fact, it’s the main reason I had so much debt.
After all, if there are no limits on how much you can borrow, it’s basically the Wild West and you can end up with literally hundreds of thousands in student loan debt.
The author of the article does offer caution about borrowing too much. Still, I think it’s representative of our debt-driven society that this is listed as a pro.
But I digress.
The Woes of the Federal Parent PLUS Loan
A Federal Parent PLUS Loan can be an enormous burden. Technically, my parents were responsible for the repayment of the loans; after all, they were the borrowers.
But I didn’t think it made the slightest bit sense for me to have a full-time and them be repaying my loans. Truthfully, I don’t know how that situation is typically handled. But I didn’t have to be “voluntold” to repay them; nope, I volunteered of my own accord.
If you recall the summary of Federal Parent PLUS Loan from the beginning of this post, a 7.6% interest rate is cited. I want to say my Parent PLUS Loan interest rate was 7.8%. I didn’t write it down, but either way, that is quite frankly ridiculous.
Not only that but the minimum payments for a Federal Parent PLUS Loan is based on the parent’s income, not that of the student. In my case, the minimum payment was $975 if I recall correctly. Again, crazy!
I ended up refinancing my student loans, which helped. But there is also another option for repayment, and that is what I want to call out here.
How to Make A Federal Parent PLUS Loan Less Painful
That’s what we’re here for, right? While refinancing my Federal Parent PLUS Loan helped significantly, I think it’s important to consider all your options. Especially with loans that can be as burdensome as the Parent PLUS Loan.
Income-Contingent Repayment (ICR)
This is the option I never even considered. According to Federal Student Aid, under ICR you will pay the lesser of 20% of your discretionary spending and what you would pay on a 12-year fixed payment plan.
You might be wondering how to determine which is less. Federal Student Aid also has a calculator to help you determine this. I tried to use it with my information and it didn’t seem to work, but maybe you will have better luck.
In any case, let’s just say 20% of your discretionary spending is lower. In my case, it definitely was.
After all, at my very first job out of college, I earned a staggering $12 an hour. Even if we consider all of that to be discretionary spending, 20% would work out to ($12*40*4)*0.2 = $384. What a huge difference from my $975 payment that is!
Exhaust Your Options
If you are weighing your options when you already have a Parent PLUS Loan, ICR and refinancing are probably your best bet. But for a number of reasons, I feel that Parent PLUS Loans should be a bit of a last resort.
There are so many options when it comes to financial assistance for college. That probably commands a post of its own. But you have to think about grants, scholarships, and all the different types of student loans. To name a few, borrowed again from Student Loan Hero:
- Direct subsidized and unsubsidized loans
- Direct Grad PLUS loans
- FFEL Stafford loans
- FFEL PLUS loans made to grad students
- Federal Perkins loans
- Direct consolidation loans
The point is there are a ton of options. In fact, there are many more I haven’t mentioned. So if you happen to be applying for school, be sure to do thorough research on this.
In closing, I would like to reiterate my recommendation to avoid Parent PLUS Loans if at all possible. If not, be sure to consider income-contingent repayment (ICR) and student loan refinancing.