How Do Parent PLUS Loans Impact Your Credit Score?November 19, 2021
As a parent, it’s natural to want to help your child succeed, and Parent PLUS Loans can be a good way to do that. But helping your child pay for college using student loans can have an impact on your own finances, including your credit history.
If you’re wondering, how do Parent PLUS Loans affect your credit? The answer is it depends on how you manage your payments. Here’s what you need to know about the Parent PLUS Loan impact on your credit score to keep your finances in good shape.
How Do Parent PLUS Loans Affect Your Credit?
If you’re wondering, does a Parent PLUS Loan affect my credit score? The answer is yes. Parent PLUS Loans function like any other type of credit. Here are a few different ways parent loans influence your credit history.
Parent PLUS Loan Credit Check
Unlike other federal student loans, there is a Parent PLUS Loan credit check when you first apply. The Department of Education won’t review your credit score, but it will check your credit reports for certain negative items. As long as you don’t have any, you’re likely to be approved.
This upfront credit check can result in a hard inquiry on your credit reports, which can temporarily cause your credit score to dip. But according to FICO, each additional hard inquiry typically knocks fewer than five points off your credit score, and they don’t impact your credit score at all after 12 months.
Opening a New Credit Account
When you receive a Parent PLUS Loan, a new tradeline will be added to your credit reports with the account balance, monthly payment amount and other details.
One of the factors that goes into your FICO credit score is your length of credit history, which includes your average age of accounts. When you open a new account, it lowers the average age of all of your accounts, which can have a temporary negative impact on your credit score.
But as long as you don’t open multiple credit accounts in a short period, this likely won’t hurt your credit much. Plus, the account’s age will increase over time, which can help improve your credit score in the long run.
As with any other form of credit, it’s crucial that you make your Parent PLUS Loan payments on time. As long as you pay on time, you can avoid late fees and negative credit consequences. However, if you miss a payment by more than 30 days, the loan servicer will typically report it to the credit reporting agencies, causing your credit score to drop.
Because payment history is the most influential factor in your FICO credit score, a missed payment can cause significant damage, and the longer it remains unpaid, the more your credit score will suffer as a result.
Is the Parent PLUS Loan Impact on Your Credit Score Worth it?
Parent PLUS Loans can have an impact on your credit score, but as long as you use the debt responsibly, you likely don’t need to worry about anything negative in the long run.
That said, there are other reasons to consider avoiding Parent PLUS Loans. For starters, Parent PLUS Loans carry a higher interest rate and loan fee than undergraduate student loans, so if your child hasn’t exhausted their allotment of federal student loans, encourage them to apply first.
Second, because the loan and its monthly payment will show up on your credit reports, that payment will be included in your debt-to-income ratio. If that ratio is too high, it can make it difficult to get approved for other forms of credit, particularly a mortgage loan.
Finally, as a parent, you likely have other pressing financial needs, especially if you’re nearing retirement age. If taking out Parent PLUS Loans and making those payments threaten your ability to retire, it might be better to encourage your child to take on student loans in their name instead.
Repay Your Student Loans Faster Through Refinancing
If you already have Parent PLUS Loans and you’re looking for a way to pay them down more quickly, refinancing the loans with a private lender can help you achieve your goal.
Parent loan refinancing involves replacing one or more existing parent student loans with a new one. Depending on your situation, you may qualify for a lower interest rate and, therefore, a lower monthly payment.
You may also be able to get more flexibility with your repayment plan. For example, ELFI offers parent loan refinancing repayment terms ranging from five to 10 years.* If you have the budget for larger payments, opting for a shorter term could help you maximize your savings.
Refinancing could also allow you to transfer your Parent PLUS Loan debt to your child after they’ve graduated from college. This will require their consent, and they’ll need to meet the lender’s creditworthiness criteria. But if they succeed, it can be a good way to offload that responsibility, so you can focus on other important financial goals.
The Bottom Line
Understanding the Parent PLUS Loan impact on your credit score can help you make better decisions about how to help your child pay for college. Between the Parent PLUS Loan credit check and opening a new account, there can be some temporary negative impact on your credit score, but it typically won’t be drastic.
With on-time payments, though, a Parent PLUS Loan can ultimately influence your credit score for good. As you start paying down your student loans, consider refinancing the debt to take advantage of lower rates and other benefits. Refinancing can affect your credit in similar ways, but again, if you do it responsibly, it can help improve your credit score over time.