Conquer your student debt. Refinance now.
You wanted to help your child pay for college, so you took out Parent PLUS loans. It seemed like a good plan at the time, but now you’re burdened by budget-busting monthly payments.
Parent PLUS loans — federal student loans that parents borrow on their child’s behalf — often come with high rates and origination fees, and can take years to pay off. On average, parent borrowers end up taking on $35,200 in education loan debt for a child who’s earned a bachelor’s degree.
Refinancing your Parent PLUS loans is one strategy to help alleviate some of the financial stress of student loan debt. Here are the pros and cons of refinancing Parent PLUS loans, and tips to help you decide if it’s the right move for you.
Consolidation vs refinancing Parent PLUS Loans
Consolidating or refinancing your Parent PLUS loans can help relieve the headache of managing multiple loans and payments. However, they aren’t the same thing, so it’s important to understand the differences between consolidating and refinancing before making a decision.
When you consolidate your Parent PLUS loans, you’ll combine them all into one loan. You can do this because they’re federal loans. Private loans aren’t eligible for federal consolidation.
Consolidating Parent PLUS loans costs nothing — you can work directly with the U.S. Department of Education — and it may simplify your monthly payment if you’ve been managing multiple payments to different lenders.
A few of the downsides are:
- You may pay higher interest rates
- Any interest outstanding at the time of consolidation gets tacked onto the loan principal
- You could lose some federal benefits, such as loan forgiveness programs.
Refinancing1 is different because you’re taking out a loan with a private lender, not the government. You’ll either renegotiate the loan repayment terms with your existing lender, or more likely, you’ll borrow from a new lender who will pay off your debt with your current lender. Then you’ll make payments on the new loan going forward.
When you refinance Parent PLUS loans, you could lower your interest rate, which may save you money over the life of the loan. However, you’ll likely have to shop around for the best rates and undergo a credit check, and you may lose out on federal repayment options and other benefits that come with these types of loans. And be prepared: The application process typically includes lots of paperwork.
The pros of refinancing Parent PLUS Loans
One way to manage your debt is to refinance your Parent PLUS Loans. With this strategy, you take out a loan from a private lender and use it to pay off your current student loans. The new loan has completely different terms than your old ones, which can have many advantages. Here are a few to keep in mind if you’re thinking of refinancing:
1. Refinancing could save you money
If you’re a borrower with good credit and a stable income, you could qualify for a student loan refinance with a much lower interest rate than you have with your current loans.
For example, let’s say you have $30,000 in Parent PLUS Loans at a 7.54% annual percentage rate (APR) and 10 years left of repayment. Over the course of your repayment, you’d repay a total loan amount of $42,807. Interest charges would cost you nearly $13,000.
But if you refinanced your loans and qualified for a 10-year loan at the Earnest starting rate of 3.24% APR, you’d repay a total of just $35,162 (includes Earnest’s 0.25% auto pay discount2). You’d save over $7,600 by refinancing your debt.
|Parent PLUS Loans at 7.54% APR||Refinanced Loans at 3.24% APR|
|Loan Term||10 years||10 years3|
The example above assumes interest rates are fixed over the life of the loan, and reflects Earnest’s starting APR of 3.24% (including 0.25% auto pay discount).
2. You’ll have one easy payment
If you took out multiple parent student loans for your child’s education, you likely have several due dates, minimum payments, and loan servicers to remember. It can be overwhelming, which may cause you to miss payments.
When you refinance your student loans, you can consolidate them all together. Even if you have a mix of federal Parent PLUS Loans and private parent student loans, you can combine them into one loan. Going forward, you could have just one payment to remember, one due date, and one student loan servicer, simplifying your repayment.
3. Refinancing could reduce your monthly payment
If you decide to refinance your loans, you can choose a new repayment term. For example, if you’re currently on a 10-year repayment plan, you may be able to opt for a 20-year repayment term instead3. By doing so, you’ll be able to secure a lower monthly payment. Keep in mind, this may end up costing you more in the long run, even if it does make payments more affordable in the short term.
4. Refinancing could give you more flexible repayment options
The interest rates on Parent PLUS loans are fixed for the life of the loan, and these rates are based on the year you borrowed the money. On the other hand, private loan rates may be fixed or variable. Variable-rate or variable APR loans tend to start with lower interest rates than fixed interest rate loans. However, variable interest rates have the potential to increase over time since they’re subject to fluctuations in market indexes like the Secured Overnight Financing Rate (SOFR).
You might choose a fixed-rate loan if you want:
- a predictable monthly payment
- to know exactly how much you’ll repay over the loan term
- an interest rate that doesn’t change
You may opt for a variable-rate loan when:
- rates are high at origination and you want a lower interest rate when they go back down
- you want to save money with a lower rate upfront
- you want to make extra payments and pay off your loan early (disclaimer: make sure there are no prepayment penalties for doing so)
Unlike federal loan rates, private loan rates are based on your credit history. Generally, loan borrowers with a strong credit history and a stable income meet the eligibility requirements for the lowest rates. If your credit is healthy, you may qualify for lower rates than you’re currently paying on your Parent PLUS loans. At Earnest, our lowest rates are only available for our most qualified borrowers, and include our .25% auto pay discount for customers who enroll and make automatic loan payments from a checking or savings account.
Here’s another benefit of refinancing: You can choose a lender that’s best for you. Look for perks like rate discounts for automatic payments and the ability to skip a payment once a year for borrowers in good standing (Earnest offers both).
5. You can transfer the loan to your child
While the government doesn’t let you transfer Parent PLUS loans directly to your child, you can transfer them by refinancing. If your child agrees to refinance, the loan would be in your child’s name, making them financially responsible for the new loan. Your child may need to meet specific underwriting requirements during the application process. Many private student loan services require borrowers to be permanent residents of the U.S.
Lenders will likely pull your child’s credit report to make sure they meet the eligibility criteria, including a minimum credit score of 670 or higher, depending on the lender. For instance, Education Loan Finance (ELFI) requires a score of at least 680, while Earnest accepts a minimum score of 650. If your child’s credit history is stronger than yours, they may qualify for a lower annual percentage rate loan. If not, you may be able to help by adding yourself as a cosigner. Lenders may also offer an additional rate reduction when you take advantage of perks like autopay discounts.
Cons of refinancing Parent PLUS Loans
Although student loan refinancing can be a smart way to handle your loans, there are some serious drawbacks to consider before submitting your loan application:
1. You won’t be eligible for alternative payment plans
If you have federal Parent PLUS Loans and can’t afford your payments under a standard 10-year repayment plan, you have three options available to you:
- You can sign up for a Graduated Repayment Plan: With this approach, your payments start out low and increase every two years. You’ll still pay off your debt within 10 years, but you’ll have lower payments early on.
- You can sign up for an Extended Repayment Plan: Under an Extended Repayment Plan, your repayment term is extended to 25 years. You’ll pay more in interest than you would with a 10-year plan, but you could have a much lower payment.
- You can take out a Direct Consolidation Loan: You can consolidate your debt with a Direct Consolidation Loan. When you do so, your loan will be eligible for an income-contingent repayment plan, which extends your repayment term and caps your monthly payment at a percentage of your discretionary income.
If you decide to refinance your student loans, your loan becomes private instead of federal. Private student loans aren’t eligible for federal benefits, so you’ll lose out on the ability to sign up for an alternative payment plan like the ones above
2. You won’t qualify for Public Service Loan Forgiveness or other repayment assistance programs
If you have Parent PLUS Loans and work for a qualifying non-profit organization or government agency, you may qualify for Public Service Loan Forgiveness (PSLF). With PSLF, your loan balance is forgiven after you make 120 monthly payments while working for an eligible employer43.
However, private loans aren’t eligible for PSLF. If you refinance your Parent PLUS Loans, you’ll no longer qualify for loan forgiveness or other federal student loan protections such as income-driven repayment plans and forbearance and deferment options.
3. You may end up paying more in interest
If you refinance your loans and are able to extend your repayment term, you may end up paying more in interest charges than you would if you kept to your current repayment schedule. However, that tradeoff may be worth it to get more breathing room in your monthly budget1.
Using the example above, let’s say you owe $30,000 in Parent PLUS loans with a 7.54% APR and a 10-year term. Your monthly payment is $356, and you’ll pay $12,807 in interest. Your total repayment will be $42,807.
Let’s say you refinance and qualify for a 5.5% APR (interest rate is hypothetical, not an Earnest rate), but you extend the term of the loan to 15 years. You’d pay just $245 a month (a savings of $111), but you’d end up paying $14,122 in interest, and shelling out a total of $44,122 over the life of the loan.
Should I refinance my Parent PLUS Loans?
You may opt to refinance your Parent PLUS loans if you want to:
- potentially save money over the life of the loan
- simplify your monthly payments
- lower the amount you pay each month
- take advantage of flexible repayment options
- transfer the loan to your child
You may choose to consider an alternative to Parent PLUS loan refinancing if you don’t want to:
- miss out on alternative payment plans that could make it easier to afford your loan payments
- forfeit your access to federal student loan benefits such as forgiveness, income-based repayment plans or deferment options
- potentially be saddled with additional interest charges by extending your repayment term
See how much you could save with Earnest
If you took out loans to pay for your child’s education, you may feel overwhelmed by your loan balance. Student loan refinancing can provide you with much-needed relief, but make sure you understand both the pros and cons before making a decision.
If you decide that it makes sense for you to refinance student loans, you can get a rate estimate from Earnest in just two minutes, and it won’t impact your credit score.
Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.
1 Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for total cost of your refinanced loan.
2 You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment from a checking or savings account. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.
3 Earnest’s Loan Cost Examples: These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $50.07) and a 1.89% APR would result in a total estimated payment amount of $12,016.57. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $56.67) and a 3.24% APR would result in a total estimated payment amount of $13,600.53. Your actual repayment terms may vary.
4 You may lose benefits associated with your underlying federal and/or private loans if you refinance such as federal Income-driven Repayment Plans, Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options. If you file for bankruptcy, you may still be required to pay back this loan.
Loan Eligibility criteria: Your debt is from paying for education at a Title IV accredited school. The debt is from your education or your child’s. The debt you’re refinancing is for a completed degree or one that will be completed at the end of this semester. You are currently the primary borrower on the student loans you would like to refinance, and you will remain the primary borrower after refinancing. You must reside in the District of Columbia or one of the 48 states Earnest Operations LLC is authorized to lend in (all but Kentucky and Nevada). This is strictly a student loan refinance product. There is no opportunity to borrow more than your outstanding qualifying student loan amount. You must be the age of majority in your state or older at the time you apply, as well as be a United States citizen or Permanent Resident Alien without conditions. Refinancing is subject to credit qualifications. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX.
Earnest Loans are made by Earnest Operations LLC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit www.earnest.com/licenses for a full list of licensed states. For California residents: Loans will be arranged or made pursuant to a California Financing Law License.
Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by agencies of the United States of America.
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