How to Balance Parent PLUS Loans and Saving for RetirementMarch 30, 2021
CollegeBoard reports that public four-year in-state tuition averages $10,560 a year, while first-year students can only get up to $5,500 in federal student loans. That leaves a gap that is increasingly being filled by Parent PLUS loans.
If this sounds like you, you’re probably wondering, what will happen to your Parent PLUS loans after your retirement? Here’s what you need to know:
What happens to a Parent PLUS loan in retirement?
There is no Parent PLUS loan forgiveness when you reach retirement. Instead, if you took a Parent PLUS loan to help your student, you’ll be required to continue making payments during retirement.
Paying Parent PLUS loans in retirement can be challenging since you’ll likely be living on a fixed income. Additionally, even before you officially retire, making loan payments can reduce the amount of money you’re able to add to your savings. That’s why it’s important to have a plan for your Parent PLUS loans while in retirement.
Paying Parent PLUS loans in retirement
If you’re retiring and still making loan payments, you can reduce what you pay each month by moving from a standard repayment plan to an extended repayment plan. This can help decrease your monthly expenses and improve your cash flow.
Unfortunately, though, there is no Parent PLUS loan forgiveness in retirement when you get to the end of 20 or 25 years and still have a balance. Instead, you’re required to keep paying down the debt.
Another option, if you’re concerned about your income in retirement, is to use a Direct Consolidation loan with your Parent PLUS loan. Once you do that, you may be eligible for an Income-Driven Repayment Plan. With that plan, if your retirement income qualifies, you may see greater savings in your monthly payments. However, the interest can still add up and your balance can grow over time.
Refinance your Parent PLUS loan before retirement
Another strategy for paying Parent PLUS loans in retirement is to refinance your loans beforehand.
Depending on when the loans were disbursed, you could be paying an interest rate of up to 8.5%. Refinancing the Parent PLUS loan before retirement could allow you to reduce your payment and redirect those funds toward your retirement savings.
When you refinance, you may also have the opportunity to change your student loan repayment term. By lengthening the repayment term, you could lower your monthly payment amount and put any extra funds toward your retirement savings.
It’s important to remember that if you do refinance with a private lender, you’ll lose access to federal loan protections. You could, however, also save on interest costs and reduce your monthly payment.
What about refinancing to your child’s name?
Depending on the situation, you may also be able to refinance your Parent PLUS loan to your student’s name. Some lenders allow you to let your child take over the Parent PLUS loan. Once you refinance to your student, they are responsible for the debt, and it’s no longer on your plate.
However, in order to refinance the Parent PLUS loan to your child, they will need to have their own credit profile and stable income. A lender will review your student’s information and determine whether they can take on the loan. If your student is in a position to take over their student loan debt, it could help you put more toward your retirement savings and even reduce the stress on your budget during retirement.
If your student can’t handle the transfer to their name, you could alternatively consider asking them to contribute some amount each month to help ease your burden.
Start planning now for handling a Parent PLUS loan in retirement
Because there is no Parent PLUS loan forgiveness in retirement, you need to start planning now. Whether you’re in retirement already, or whether you’re a few years out, carefully consider whether consolidating or refinancing a Parent PLUS loan might be the right move for you.
If you’re able to reduce your monthly payments and invest at least some of the difference, it could help you improve your cash flow and grow your nest egg so that the debt isn’t weighing on you as heavily.