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Parent PLUS Refinancing: A Solution for a Growing Problem

Published on Author Bethany Sims

Student loans are a burden at any age, but young professionals and recent graduates have a big advantage in paying off their loans: time. Parents often take out loans for their children’s education and are stuck with an extra financial burden at a time when they may already have other financial priorities such as paying off their mortgage or boosting retirement savings. Here is how refinancing can help. 

Parent loans at a glance

Parent PLUS loans carry a 6.31% interest rate for loans taken out during the 2016 – 2017 academic year. During the 2014 – 2015 academic year, rates were at a staggering 7.21%. Parents often take out loans for their children after all other options are exhausted, or to simply save their children from taking out student loans.

From 1995 to 2015, the number of parents taking out loans increased by 56% from 3.6 billion to 12 billion, according to a recent study by the University of Southern California. These growing numbers for parents are a fairly recent problem. The USC study found a correlation between income earned and average debt size, with higher incomes having higher debt loads. The average debt taken out by parents is $21,000. Parents with higher incomes have an estimated $30,000 in debt – almost the same as 2015 graduates who took out an average of $30,100 to pay for school. Borrowers who take out loans for their own education have a similar correlation; typically, the higher the debt, the greater the earning potential. Unfortunately, parents are stuck with larger loan balances and less time to pay them off. Enter: refinancing.

Refinancing options for parent loans

The key benefit of student (and parent) loan refinancing is getting a lower interest rate. The lower your rate, the more money that goes to the principal balance of the loan. Another benefit of refinancing is to get all of your loans on the same term. We offer 5, 8, 12 and 15 year terms to offer flexibility for your financial situation. If you need to free up cash flow, go with a longer term. Looking to pay off your debt as quickly as possible? Shorten your term and lower your rate to put more cash towards the principal balance of your loan and pay off your debt faster.

Cosign or transfer parent loans

A unique option for parents refinancing through Purefy is to transfer the responsibility of their PLUS loans to their adult children, as long as the child meets our eligibility requirements. To do this, have your child apply and select “refinance my parent’s parent PLUS loans” on the “Loan Details” page of the application. If they also have student loans to refinance, they can combine their loans with the PLUS loans. If you do transfer and still want to help your children, consider being a cosigner for them. Cosigning can help lower their interest rate if you have a higher credit score than they do. This allows you to save your child thousands in interest costs, but you won’t end up with the bill. Cosigning does mean you have a joint responsibility for the loan, so make sure you and your child understand what it means for both of you if they should miss a payment.

Student loan debt isn’t just a problem for young professionals. With higher rates on parent PLUS loans and other more pressing financial obligations, parents are facing similar difficulties as recent graduates.  Parents should be able to focus on retirement or paying off their mortgage without the burden of high interest rate student loans, and that’s where refinancing can help.

 

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