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With the rising cost of a college education, parents are increasingly turning to federal PLUS loans to help pay for their children’s education. Since 2016, the amount of Parent PLUS loans outstanding has increased from $71.1 billion to $104.8 billion, an increase of 47%.
With high interest rates and fewer repayment options, PLUS parent loans are one of the most difficult types of federal student loans to repay. The consequences of non-payment can be serious and have a significant impact on your finances. However, there may be options to get some relief.
What happens if you don’t pay Parent PLUS loans?
According to a recent study by Sallie Mae, parents typically cover around 10% of education costs through loans. On average, parents borrow $11,394 a year in student loans to help their children pay for college. If you took out this amount in Parent PLUS Loans for your child’s four years of college, you would be over $45,000 in debt.
Worse still, PLUS loans have higher interest rates than other federal loans. For the 2021-22 school year, the rate is 6.28%. This is significantly higher than the 3.73% rate that applies to undergraduate student loans.
With such a large balance and such a high interest rate, the payments may be more than you can afford. However, missing your PLUS loan payments can be a costly mistake. The size of an error depends on how late your payments are.
After 30 days: the lender may charge a late fee
Late fees are the first consequence when you miss your due date. If you do not make the required full payment within 30 days of the due date, the lender may charge a late fee of up to 6% of the payment amount. If your payment is $300, for example, a 6% late fee would be $18.
After 90 days: delinquency is reported to the credit bureaus
If you miss your student loan payment for 90 days or more, your loan officer will report the default to the major credit bureaus – Experian, Equifax and TransUnion. Delinquencies on loans can significantly affect your credit and cause your credit score to drop.
After 270 days: your loan is in default
Once your account is 270 days past due (about 9 months), your loan is in default. Non-payment of student loans is a serious problem, and the impact can be severe. If your account is in default, lenders can take the following steps to get their money back:
- Report a default to the credit bureaus: Payment defaults can significantly damage your credit. With a default on your credit report, it may be difficult, if not impossible, to qualify for other loans or lines of credit.
- Accelerate the loan: When a loan is accelerated, the entire outstanding balance of your loan and any interest become due immediately.
- Garnish wages: Federal loan servicers don’t need a court order to garnish your wages. Once your account is in default, they can coordinate with your employer to take up to 15% of each paycheck.
- Treasury compensation: With Cash Offset, loan servicers can take your tax refund, Social Security benefits, or other federal payment benefits to pay off some of your debt.
- Lawsuit to collect: If you are in default, lenders can sue to collect the money you owe. You may be liable for court costs, attorney fees and collection costs.
- Loss of aid eligibility: If you are unable to repay your Parent PLUS loans, you are no longer eligible for any other form of federal assistance, including loans for your other children.
6 Strategies If You Can’t Pay Your Parent PLUS Loans
If you can’t afford PLUS loans from your parents, consider the following methods to make payments more manageable.
1. Consolidate with a direct consolidation loan
If you consolidate your parent PLUS loan with a direct consolidation loan, you can extend your repayment term and get up to 30 years to repay your loan. A longer term means more interest will accrue, but it can also significantly lower your monthly payment.
Note that consolidation can affect your progress toward loan forgiveness, so make sure you understand the implications of a consolidated loan before moving forward.
2. Research alternative payment plans
For some student borrowers, income contingent repayment (IDR) plans may provide some relief. IDR plans base your payments on a percentage of your discretionary income and offer a longer loan term.
Parent PLUS loans are not eligible for any of the IDR plans as is, but there is a workaround. If you consolidate your loans with a direct consolidation loan, parent borrowers may become eligible for income contingent repayment (ICR). Under ICR, the payout term is extended to 25 years and your payouts are determined using 20% of your Discretionary Income.
Check with your loan officer to see if you might qualify for ICR, or use the Federal Student Aid Loan Simulator for more guidance.
3. Consider postponement or abstention
If you can’t pay your payments due to sudden financial difficulties, such as becoming seriously ill or losing your job, you may be able to suspend your payments until things improve. With parent PLUS loans, you can qualify for forbearance or deferral, allowing you to defer your payments for up to 12 months at a time.
This option is best for borrowers who anticipate short-term difficulty repaying their loans. Interest will continue to accrue while forbearing and your balance will grow, so it’s not a good long-term solution.
4. Find out if you qualify for loan forgiveness
Depending on your situation, your Parent PLUS loans may be eligible for a discount. To get loan forgiveness with parent loans, you must first consolidate them with a direct consolidation loan and register with ICR. Once you do, you may qualify for one of the following programs:
- ICR sorry: With ICR, your remaining loan balance will be canceled if the loans are not fully repaid at the end of your 25 year term.
- Civil Service Loan Waiver (PSLF): If you work for a non-profit organization or government agency, you may be eligible for the PSLF after making 120 eligible monthly payments. Borrowing parents are only eligible for the PSLF if they consolidate their debt with a direct consolidation loan and enroll in the ICR.
5. If you don’t need federal benefits, consider refinancing
Depending on when you took out your loans, they can have high interest rates. Parent PLUS loans have had rates over 7% over the past decade.
If you’re not using federal loan benefits like IDR plans, loan forbearance, or loan forgiveness, one way to manage your debt is to refinance your student loans. If you have good or excellent credit and a reliable income, you could potentially get a lower rate to lower your payment and save money.
Some student loan refinance lenders, such as ELFI and Laurel Road, even allow you to refinance your debt in your child’s name. If your child agrees and meets the lender’s borrower criteria, they can take over parent PLUS loans and you won’t be obligated to make any more payments. The account will be listed as “paid in full” on your credit report.
Use a student loan refinance calculator to see how much you could save by refinancing your debt.
6. Ask your child for help
Children are not legally responsible for repaying parent PLUS loans, and there is no way to transfer the debt into their name without refinancing with a private lender and forfeiting the benefits of the federal loan. As the borrowing parent, it is your sole responsibility to repay the debt.
However, if you can’t afford the payments or are sacrificing your own retirement fund to pay off your parents’ PLUS loans, it may be worth asking your child for help. If they are working and earning a stable income, they can contribute financially to payments and reduce pressure on your own budget. Or they may be willing to refinance the loans on their behalf so you don’t have to worry about it.
Legally, you can’t force your child to make payments, but it’s worth discussing.
Managing Your Parents’ Student Loans
Now that you know what happens if you don’t pay Parent PLUS debt, you can explore your options to get back on track.
As soon as you realize you might miss a payment, contact your loan manager. You may qualify for an alternative payment plan or forbearance to give yourself some time to recover. You can also refinance the loan in your child’s name, which will relieve you of this burden.
Do not hesitate to ask for help. It’s best to be proactive and act now to avoid missed payments.