Should You Refinance Private Parent Loans in 2020?September 16, 2020
Are you a parent who took on student loans for your child to attend school? If so, you are not alone. As of 2019, over 3.4 million people have Parent PLUS loans. The payment of the loans may become burdensome as the desire to save and enjoy retirement approaches. If extra money in your budget could help, Parent PLUS loan borrowers may want to take advantage of the current low rates and refinance the student loans they took on for their children.
Types of Parent Loans
Before you decide whether refinancing is beneficial for you, it’s helpful to know what types of loans you have. Parents may have private parent loans that are borrowed through a private lender such as a bank, or Parent PLUS loans that are borrowed through the federal government. Parent PLUS loans are also known as Direct PLUS loans. Here’s a breakdown of how the two types of parent loans differ:
- Interest Rates: Typically private parent loans will have a lower interest rate than Parent PLUS loans. Parent PLUS loans can have an interest rate as high as 7.06% in recent years, whereas private parent loans can have an interest rate of around 4%.
- Loan Terms: Private parent loans can also have a fixed or variable interest rate and have a loan term from 5 to 25 years. Parent PLUS loans have a fixed interest rate and an origination fee. The loan term can last from 10 to 25 years.
- Additional Benefits: Since the Parent PLUS loan is through the federal government it is eligible for an income-contingent repayment plan, meaning the payment is based on your income and family size.
Current Benefits for Parent Loan Borrowers
Currently, Parent PLUS loans are eligible for benefits through the federal government due to the CARES Act passed by Congress on March 27, 2020, in response to the COVID-19 pandemic. The benefits are set to expire on September 30, 2020, however, an executive order was issued on August 8, 2020, directing the benefits to continue through December 31, 2020. The protections provided by the CARES Act, and continued through the executive order, for Parent PLUS loans include:
- The interest rate on the loan is temporarily reduced to 0%. No interest will be accruing on the loan during this time. However, interest will begin accruing again at the previous interest rate on January 1, 2021.
- Administrative forbearance – This provides for a temporary suspension of payments during this time. Payments are set to resume in January 2021. This means you can save money to make a lump sum payment on your Parent PLUS loan when payments resume. Alternatively, you can use the money as an emergency fund if payments become difficult to make.
- Stopped collections – Any defaulted loans would no longer be subject to collections during this time period.
How to Know Whether You Should Refinance
With these benefits currently in place, it is fiscally responsible to take advantage of the federal protections provided for Parent PLUS loans rather than refinancing at this time. However, private parent loans are not eligible for any federal protections, making them prime candidates for refinancing. Currently, interest rates for refinancing are at an all-time low because of the Federal Reserve lowering interest rates in response to the pandemic. This makes it a great time to take advantage of these low interest rates for private parent loans.
Refinancing rates for private parent loans are as low as 2.39% for a variable interest rate and 2.79% for a fixed interest rate as of September 14, 2020. This new rate could lead to significant savings depending on your current balance, rate and loan term. At ELFI, you can prequalify to see what rate you would be eligible for. You can also use our Student Loan Refinance Calculator to get an estimate of your savings based on a range of interest rates.*
Not only does refinancing private parent loans save you money monthly by securing a lower interest rate, but refinancing to a lower interest rate also saves you in interest costs over the loan term. In addition, the other benefits of refinancing private parent loans are:
- Combining multiple private and federal Parent PLUS loans into one loan with one payment
- Changing the loan term length by either shortening it to save on interest costs or lengthening it to lower your monthly payments
If refinancing sounds right for you, it’s important to know the eligibility requirements. These will make you more likely to qualify for the best rate at ELFI:
- A strong credit history, with a minimum credit score of 680
- Steady employment with a minimum income of at least $35,000
When you refinance student loans at ELFI there is never an application fee or origination fee. You will also never pay a prepayment penalty.
Although interest rates are at a record low, it is advantageous to benefit from the current Parent PLUS loan protections for the time being. Then, in 2021, you can take advantage of the low interest rates if you choose to refinance. If you have a private parent loan, now is a great time to lock in a lower interest rate and start saving some money.
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*Subject to credit approval. Terms and conditions apply.