The parent PLUS loan scheme was designed to allow the adoption of biological parents to borrow money to fund the education of their children. The scheme allowed eligible parents to borrow the complete cost of their child’s education while they were attending school.
On the surface, this appeared to be an excellent option for many parents who otherwise could never afford to pay for their children’s education. But PLUS loans have the highest rates of interest of all federal student loans. The rate of interest charged on loans arranged between July 2018 and July 2019 was 7.6%. These excessive rates of interest have led to loan balances of many parents ballooning very quickly. Most if not all end up paying way in excess of what they originally borrowed or ever expected to repay. Many parents have been forced to seek forgiveness of this debt. Here are the two options open to them.
Parent plus loan forgiveness through income-contingent repayment
Many parents who simply cannot afford the repayments have been forced to apply for an alternative Parent PLUS loan repayment plan, such as an ICR (income-contingent repayment) plan. Under the terms and conditions of an ICR, their repayment will be capped at just 20% of their discretionary income, or what would cost if your payments were fixed for 12 years, whichever is less. Plus loans are not directly eligible for an ICR but an advisor can arrange for you to consolidate your PLUS loan with another Direct Consolidation loan allowing you to enter an ICR, reducing the amount of your repayments. Parents should only switch to ICRs if they are certain they cannot afford the repayments attached to the standard federal repayment plans. You will pay more interest and have to pay income tax on any amount forgiven.
Parent plus loan forgiveness through public service loan forgiveness
Because of the pitfalls of IRCs, many parents have chosen the route of PSLF (Public Service Loan Forgiveness), which means they will get their remaining PLUS loan balance forgiven after making 10 years of minimum payments while under the employment of a government agency, non-profit or other eligible employers.
Unfortunately, PLUS loans are also not eligible for PSLF as it stands, you will also have to instead consolidate them under a Direct Consolidation Loan, then I enter into an ICE plan. This plan will allow you to make the 120 payments needed to gain loan forgiveness.
Both of the above options may seem complicated, but our partners are ready will and able to help you through the whole process.
If either of the options above are not suitable for your current situation there are a few alternatives available.
Declaring bankruptcy to discharge a PLUS loan
Discharging a PLUS loan through bankruptcy solely applies to them, even though they have not directly benefited from the loan. Put differently if you have a PLUS loan and you file for bankruptcy, you must be able to demonstrate to the courts that repaying the loan is causing undue hardship on you.
In the vast majority of cases to discharge a plus loan, you will have to bring a separate action in the case, this is called a complaint to determine discharge ability. The complaint asks the Judge in the case to rule that the PLUS loan is dischargeable. This is like a mini lawsuit within the bankruptcy filing. You can present witnesses or evidence to the court to support you in the hearing. Be ready for the PLUS loan creditor to oppose this complaint, our partners have extensive experience helping parents with these types of cases.
Refinancing Parent PLUS loans
Declaring bankruptcy or getting PLUS loan forgiveness isn’t a viable option for everyone. 25 years may just be too long to wait, or you may be able to work for a qualifying non-profit. If this is the case, you can consider refinancing your PLUS loans. With this approach, you request a new loan from a private lender to finance the PLUS debt. These new loans will be negotiated under more favorable terms, including lower interest rates, longer repayment terms, and a lower monthly repayment. You will no longer have any federal debt. You will lose out on some potentially beneficial federal schemes such as access to ICRs or the option to enter into loan forbearance. But there are three key benefits to refinancing.
#1 Lower interest rates
You can opt for a longer repayment term, which means you could qualify for a much lower interest rate. You can also qualify for a lower monthly repayment. In some cases both.
#2 Extra free cash
If you reduce your monthly financial obligations by refinancing your PLUS loan, you will be able to save a significant amount of money. Most of your money goes towards repaying the principal, keeping more money in your bank account. This can be used to discharge other debts or even to invest elsewhere.
#3 The loan is transferable
The key advantages of refinancing are the fact the person who benefited from the loan can now take possession of it. Under the PLUS scheme, the student is not responsible for repaying the loan. If your children are financially well off, transferring the burden of this debt to them will be an option. Certain lenders are perfectly happy to facilitate the transfer of this debt. They are happy to get newer younger customers on their books.
One of the final options available to a parent in need is to consolidate their loan. This will not save them any money in the long run. But this is not the purpose, right now they need to be released from the existing burden of debt. The ICR we mentioned earlier remains just one form of debt consolidation. Talk to a financial adviser about other options. You can stretch the term from 10 to years depending on the balance of the loan. The longer the loan period the lower the monthly repayments, you will pay more interest over time. The hope is in ten years’ time, your income will have increased to the stage that these repayments will not be a burden.
Dealing with the burden of a Parent PLUS loan that you cannot service is stressful and in many cases overwhelming. Student Loan Battle is uniquely positioned to offer you guidance as to the best way for you to deal with this burden.