Episode Transcript
Brenton: [00:00:00] When their child has maxed out the amount of money they're able to borrow for their undergraduate education, many loving parents take out a particular type of loan to help them called a parent plus loan. But when it comes time to repay it, they find out just how damaging these loans can be.
In this episode, we tell you about Parent PLUS loans and a particular strategy you can use to repay them that's a little easier on your wallet for a limited period of time.
Let's get started.
Brenton: Hello, my name is Brenton Harrison of Escape Student Loan Debt and your host for the Escape Student Loan Debt podcast. We are in the middle of October. student loan payments have started for many people. They might have just made their first payment or it's upcoming in a few weeks. So that's what's on your mind.
And we've talked ad nauseum about some of the ways that you can deal with them over the course of the past year. We also in recent episodes have done our first few episodes covering [00:01:00] private loans, but a particular type of federal loan that we've left on the shelf for now has been a loan called parent plus loans.
Part of that is because while there's an increasing number of people who have them, I would say that the majority of people don't have them. And we try to make sure that we're speaking to the largest swath of our audience, but we don't want to ignore people who do have this type of loan because it can be really, really damaging.
So let's go through what a parent plus loan is, why someone would take it out, why it's so difficult to repay it in a temporary option that you have to do so in a way that's a little easier on your budget. So what is a parent plus loan? Well, a parent plus loan is a loan that a parent takes out in their name for the benefit of their student.
So if I have a child who's in school and I take out a parent plus loan, that loan's in my name, even though it's for my child's benefit, they're not on the hook for that loan at all. Now, the reason that someone would take this out in the first place is for graduate school, there's not really limits, if any, on how much you can borrow.
That's how we come across people who went to med school or dental [00:02:00] school who owe 400, in student loans. But for undergraduate degrees, there is a limit on how much you can borrow. And if your child's going to a really expensive institution, they're going to the Vanderbilts of the world. If you're out my way, the Harvards, really just any private college that costs tens of thousand dollars on a yearly basis, or even if you're going to a state school, that's out of state tuition, you can bump up against that max where your child has gone up to the absolute limit of what they're able to borrow in their name. And there's still a shortfall. And when this occurs, people, if they can't cashflow it themselves as a parent, they may step in and take out a parent plus loan in their name to cover that difference.
Now, unlike other forms of federal student debt, parent plus loans do have actual credit requirements. So if you've defaulted or are delinquent in another form of debt in your finances, definitely for student loans, if you defaulted or have been delinquent, you're not going to be in a position where you can take out a parent plus loan for your child.
But beyond that, it's not one of those things where it's like, Oh, [00:03:00] you can't get this loan unless you have a 700 credit score. It has a credit element, but it is more so just, are you in a position where you've signified that you can't be quote unquote trusted with additional debt? But within that realm of possibilities, most parents are approved for a parent plus loan, but it is at a higher interest rate than what you'd find with a loan that the child takes out in their own name. So the first thing that you can see in terms of it being a little problematic is the fact that the interest rate, just in terms of if you're trying to pay your loan off in full, is going to be higher than what you might find under an undergraduate loan.
As an example for Parent PLUS loans that were issued after July 1st of this year, between now and July 1st of next year, the interest rate on these Parent PLUS loans is 8. 05%. Now let's compare that to what the student would receive if they took out a direct unsubsidized loan for their undergraduate studies, it would go from 8. 05 percent all the way down to 5. 5%,
So what is a significant difference if you're trying to actually repay that loan in full when [00:04:00] you're looking at what the parent would pay by taking out a PLUS loan versus what the student would pay if they're able to borrow within their limits?
For this reason, if someone is trying to pay off a parent PLUS loan in full, With that high interest rate, they often, after their child is out of school, look into refinancing it with a private lender because that interest rate on the plus loan is so high, they can often find a private lender who is able to do it at a lower interest rate and they will refinance with them and just pay it down with less interest, less money over the course of the repayment period. If you are trying to make sure that that loan goes from your name into your child's name, that really depends on several scenarios. You cannot do that under the federal umbrella.
So you can't take a parent plus loan that you took out in your name while they were in school and within that federal umbrella somehow make it their loan at any point in time.
So you can't do that. But when it comes to refinancing, there are some lenders in the private loan space that will allow a parent plus loan to go from the federal government loan in the parent's name into [00:05:00] the name of the child. Now, in order for them to agree to that, the child has to be in pretty good financial standing.
So it's not something where you're going to be able to, when your child immediately leaves undergrad and is making 20 000 a year, take some 100, 000 parent plus loan that's in your name and refinance it into the name of your child. But if that child's a few years removed from school, they're on their own, they have good credit, you can conceivably find a lender who will put it in their name and take it off of your shoulders.
If you're like most parent plus borrowers, however, who are accumulating tens of thousands, if not hundreds of thousands of student loans in their name, then you are not trying to pay it off in full. You're trying to have it forgiven. Just like people are trying to have their student loans forgiven under the income driven repayment plan umbrella.
And this is where you can really run into trouble when it comes to Direct PLUS loans because Parent PLUS loans do not have anywhere near the flexibility when it comes to income driven repayment like you find with loans that are taken out in the name of the student.
You'll recall the income driven [00:06:00] repayment plans is just a type of repayment plan that has similar features once you get under that umbrella, they all base their student loan payments on a percentage of something called your discretionary income.
You pay that percentage for a certain number of years until any balance is forgiven after that period. But we've also shared that under that umbrella, the way they calculate discretionary income, the percentage of that discretionary income and the length of time that you have to repay it can differ across each plan.
To this point, the plans we've covered under that umbrella are Income Based Repayment, Pay As You Earn, and Revised Pay As You Earn, which is now called the SAVE plan.
But there's a fourth plan under that umbrella that we haven't covered, and it's called the Income Contingent Repayment plan. Income Contingent Repayment Plan is far and away the worst income driven repayment plan with the most punitive payment and the longest repayment period. And the reason that we're covering it in this episode is because it happens to be the only plan you can use with Parent PLUS Loans.
So let me walk you through why this plan [00:07:00] is so punitive.
The first is the repayment period. Just like the save plan for graduate school loans, just like the old income based repayment plan under the income contingent repayment plan, you have to pay for 25 years until your loans are forgiven. So it has the longest repayment period of any of the income driven repayment plan.
But here's where it gets worse when it comes to the percentage of your discretionary income that you pay under the old IBR, it's 15 percent under the new IBR, it's 10 percent under pay as you earn. It's 10 percent under save. It is 10 percent for graduate school loans, 5 percent for graduate school loans
but for the ICR plan, it is 20%. it is double most plans and four times higher than what you would pay as an undergraduate borrower under the save plan in terms of the percentage that they require you to pay. But it gets even worse because when it comes to how they calculate that discretionary income, you'll recall that the formula is the adjusted gross income from your previous year's [00:08:00] tax return minus a certain percentage of the federal poverty level.
And the higher that percentage of the federal poverty level is that you get to take off the table before they calculate your payments, the better. That's why the save plan is so beneficial because they allow you to take 225 percent of the federal poverty level for the number of people in your household off the table before they calculate your payments.
With the pay as you earn plan and the income based repayment plan, it is 150 percent so it's still a pretty sizable percentage of the federal poverty level you get to remove before they calculate the percentage of your discretionary income, but with the income contingent repayment plan, it's. Only a hundred percent.
There is no multiple. It's one times whatever that federal poverty level may be for the people in your household. So not only is it the longest repayment period, not only is it the highest percentage of discretionary income that you pay, but it is the most restrictive calculation of discretionary income that you see under this plan.
and I did some back of the napkin [00:09:00] math so you can understand just how much of a difference this would make. Let's say that we have a household of three, and they have an adjusted gross income of 100, 000. So that's their number that they're going to use, and they get to take away a certain percentage of the federal poverty level based on the plan that they've signed up for for income driven repayment.
Now, if they were signed up for the SAVE plan, and they had graduate school loans, that would mean they take their 100, 000, they subtract 225 percent of the federal poverty level for a family of three, and it leaves them with a discretionary income of just over 44, 000 for the year.
Now, if these were for graduate school loans, then they would pay 10 percent of that number, which would mean a payment of 367 a month. But you'll recall parent plus loans are typically taken out for the undergraduate studies of the child. So if this were a payment plan for undergraduate loans only, it would drop down to 5 percent of that discretionary number, which would be [00:10:00] 183 a month.
So keep that number in your mind, save plan, undergraduate loans, 100, 000 adjusted gross income. This family would still only pay 183 a month towards their loans. Now let's see what it would be under the income contingent repayment plan. It's the same adjusted gross income. Now they're subtracting just the federal poverty level.
They don't get to do a multiple. So they subtract 24, 860. Now it leaves them with a discretionary income of 75, 000. That's 31, 000 more than our previous example. And they have to pay 20 percent of that number. So whereas under the save plan, we got to take more off the table.
We're paying a lower percentage. It led to 183 a month. With income contingent repayment, their monthly payment in this example would be $1,200 a month towards their student loans now. These loans are still eligible for things like public service loan forgiveness and income driven repayment.
But how long are you gonna stay on it when you have to pay [00:11:00] $1,200 a month because you earn. A hundred thousand dollars a year as a family, which is not no money, but there's plenty people out there who earned that, who are unable to pay 1, 200 a month towards their student loans. So ICR, as I said, is extremely punitive.
It's not something that's very appealing, even if you're someone who's pursuing public service loan forgiveness. So after the break, we're going to tell you a way to do an end around with your parent plus loans, potentially make yourself eligible for some of the other income driven repayment plans and what you need to do in a certain timeframe if this step is something that you plan to pursue.
[00:12:00]
Brenton: Alright, so what is the tool that you can use to do this end around and by when do you have to complete it? This tool is what's called a Double Consolidation of Parent PLUS Loans. This is something we're going to devote an entire episode to in our next episode, because it's too much to cover in this brief episode.
But essentially what you're doing is you're going through multiple steps to change the status of a parent plus loan into just a direct loan. And when you strip that parent plus status, it makes it eligible for all of the income driven [00:13:00] repayment plans and lowers the amount that you pay on the loans throughout your repayment period.
The reason I bring this up in this episode as a preview is because you do not have an unlimited amount of time to take the steps needed in order to make a parent plus loan, a direct loan. And that process can take six to nine months depending on how fast the loan servicer acknowledges the applications.
This is important because the process of doing this is something that's one of those loopholes that the department of education has been aware of, but has not closed. But that is all changing. Starting in July of 2025 you will not be able to complete the double consolidation of a parent plus loan and any attempts to do so have to be completed before that date in time.
So what we're going to do in the next episode is we're going to tell you that process step by step. It's very involved. You're going to need a paper and pen, but if you have those steps, you can make sure that before that point in time, you can recharacterize those loans and put yourself in a position where if you have that parent plus loan, you can make yourself eligible for that [00:14:00] 5 percent payment or that 10 percent payment, just like your child would be if it's in their name.
So this is just a quick primer on the Parent PLUS Loan Umbrella, why it can be so damaging to set you up for our next episode where we walk you through the double consolidation process. If you have these Parent PLUS Loans and you were not aware of the fact that there's a light at the end of the tunnel, then that episode will be very illuminating for you.
And I hope to see you then.
