When you think of your golden years, you think of rest, relaxation, travel and the good life.
The last thing on your mind: student loans.
Yet, for millions of Americans, student loans are still a reality. Here's what you need to know and what to do about it.
Latest Student Loan Statistics: Parent PLUS Loans
The latest student loan debt statistics show there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the U.S. alone. According to Make Lemonade, student loan debt is now the second highest consumer debt category - behind only mortgage debt - and higher than both credit cards and auto loans.
The numbers are staggering for Parent PLUS Loans, in particular. There are 3.6 million borrowers who collectively owe $88.9 billion in Parent PLUS Loans. This amount does not include Parent Loans, which can be borrowed from private lenders. On a percentage basis, the largest increase in student loan debt over the past five years has come from a surprising age group: 60 to 69-year-olds, who have experienced a 71.5% increase in student loan debt. However, on a dollar basis, this age group represents a $35.6 billion increase over the same period, which is the lowest increase among all age groups.
Today, the average Parent PLUS Loan balance is $25,600, with annual borrowing amounts having more than tripled over the last 25 years. The fact that parents are carrying student loan balances for their children's education has created a financial strain at a particularly inopportune time for many parents, who depend on Social Security and have limited other sources of income. Some parents are even working later to pay off student loans. For example, AARP says that in 2018, Americans age 55 and older were hired for 49% of the 2.9 million new jobs gained in 2018, which represents the largest share of any age group.
How Does A Parent PLUS Loan Work?
A Parent PLUS Loan is a federal loan from the U.S. government that a parent borrows on behalf of a dependent undergraduate student to finance the dependent's education. For the 2018-2019 academic year, the interest rate on a Parent PLUS Loan is 7.6%, and the one-time fee is 4.248% of the amount borrowed.
There are several issues with Parent PLUS Loans, including for borrowers with a strong credit profile. First, like all federal direct loans, each borrower receives the same interest rate regardless of credit score. Therefore, a borrower with an excellent credit score could be charged a relatively higher interest rate than they could receive with a private lender through a Parent Loan. Second, unlike federal student loans, Parent PLUS Loan borrowers are ineligible for income-driven repayment plans, which reduces payment options and flexibility.
So, what can parents do to repay Parent PLUS Loans? Here are two options to consider.
1. Transfer Parent PLUS Loan To Your Child
The federal government does not permit parent borrowers to transfer Parent PLUS Loans directly to their children.
However, you can "transfer" your Parent PLUS Loan indirectly through Parent PLUS Loan refinancing, which is similar to student loan refinancing. The result is a lower interest rate and your child becomes financially responsible for the new student loan. To get approved, a private lender evaluates the financial and credit profile of your child graduate. This benefits you, since you may be retired or nearing retirement, and your income may be limited. When you refinance Parent PLUS Loans, the child graduate becomes the sole borrower and the parent is effectively absolved of any financial obligation.
2. Refinance Parent PLUS Loans
If you don't want to transfer your Parent PLUS Loan to your child, you can refinance a Parent PLUS Loan with a private lender, lower your interest rate and save money. The result is a new loan with a lower interest rate and lower monthly payment, which can save interest costs. To get approved for Parent PLUS refinancing, a private lender will evaluate several factors, which may include your income, employment, monthly cash flow, other debt obligations and debt-to-income ratio.
This student loan refinancing calculator shows you how much money you can save by refinancing your Parent PLUS Loans. For example, let's assume that you have a $60,000 Parent PLUS Loan at an 8% interest rate, and can refinance with a 3% interest rate. You could save $17,832 and lower your monthly payment by $149 per month. This can help to pay off your student loans faster.
