Parent PLUS loans are federal loan options available for parents to take in, and borrow money to contribute towards their child’s college expenses. In such cases, while those types of loans could be quite an invaluable short-term financing of college, they often carry higher interest rates compared to other federal student loans. Eventually, this can become very costly. Refinancing a Parent PLUS loan is one way to lighten the burden, but it’s worth knowing when the time to look into such refinancing may arrive.
How to Understand Parent PLUS Loans
Before diving into the refinancing of Parent PLUS loans, it’s essential to revisit how this loan product works. The federal government issues Parent PLUS loans, which typically bridge the cost gap in higher education that isn’t covered by other forms of financial aid, scholarships, or student loans, for instance. Unlike student loans, which are borrowed by students, payment in a Parent PLUS loan rests solely upon the parent.
Why Refinance a Parent PLUS Loan?
Refinancing has the potential to save one thousands of dollars on a Parent PLUS loan over the life of the loan. You are taking out a new loan from a private lender to pay off the old one-ideally at a much lower interest rate. The purpose is to lower the interest paid and/or to modify repayment terms for a better fit with your financial situation.
Here are some key reasons Parent PLUS refinancing might be the right thing for you to consider moving forward with:
Lower Interest Rates: Many times, private lenders offer much better interest rates compared to what the federal government provides. This is especially true if you or your child have a good credit history.
Increased Cash Flow: Refinancing works to free up money that would otherwise be directed at monthly payments and help with other expenses or financial goals.
That would imply, by refinancing you can aggregate a lot of Parent PLUS loans into a single loan, having only one monthly payment.
However, before refinancing, consider these possible downsides: refinancing through a private lender, on the other hand, may mean giving up other federal loan protections, which come in the form of income-driven repayment plans and loan forgiveness programs.
When to Refinance?
While refinancing can provide huge financial opportunities, it is not always the right move for each parent. Your decision to refinance should be based on your unique financial situation at the time, along with the interest rate environment and your long-term financial goals.
Here are the key things to consider when determining if it’s time to refinance your
Parent PLUS loan:
1. Interest Rates Are Low
One of the best times to refinance is when the interest rates are low. If your current interest rate happens to be higher than what private lenders are offering, then refinancing could save you a decent amount of money. Pay attention to the financial market and its trends to tell you when the best time would be for action. A minimal decrease in your interest rate could amount to very substantial savings over time.
2. Strong Credit Score
Private lenders use your credit score and financial health to determine how much they can lend you, and at what rate. If you’ve built or maintained a good credit score since taking out your Parent PLUS loan, you’ll likely qualify for lower interest rates. You typically get the best rates if your credit score is 700 or above, though some lenders allow lower scores for a higher interest rate in return.
3. Stable Financial Situation
Refinancing requires you to have a steady income and be on stable financial ground. If you find yourself financially fit, most likely with stable income and too high levels of debt, then this is the right time for refinancing. A sure flow of income may make you appealing to private lenders and may help you in negotiating better terms.
4. Your Child is Nearing Graduation or Has Graduated
That’s refinancing. Refinancing might make more sense when your child is near graduation or has graduated because, quite frankly, one’s financial needs are much easier to project once college expenses are no longer ramping up. Refinancing also allows some parents to transfer the loan to their child, although in such a case, the child must agree to take responsibility for the loan and then qualify for it.
5. You Want to Lower Monthly Payments
Refinancing can be a good option if you want to lower your monthly payments, especially if you choose to extend the loan term. Just know that this often means you’ll pay more interest over time, so it might not be worth it if saving money in the long run is what you want.
6. You Don’t Need Federal Loan Protections
You give up federal protections like deferment, forbearance, and income-driven repayment plans when refinancing any type of Parent PLUS loan with a private lender. In cases where you are comfortable that you will be able to make regular payments and will never face those kinds of safety nets, refinancing can be a good option. In the event that you think you could need those federal protections, you might be better sticking with your federal loan.
Conclusion
Refinancing is a great option to lower your interest rate, decrease your monthly payments, or take multiple loans and consolidate them into one. But again, timing and financial position will be everything in making that decision. If the interest rates are in your favor, your credit score is good, and you will not need federal protections, refinancing can save you a bundle in the long run.
Ultimately, refinancing is a personal decision, based on your specific financial goals and particular circumstances. Take your time, assess the pros and cons, and then make your final decision.