Cost effective ways to borrow and repay student loans

For many families, applying for a Parent PLUS Loan may seem like a good option. Before making the decision to apply for a Parent PLUS Loan, there are a few things to consider. For parents, these types of loans can interfere with saving up money for retirement or the money could simply not be available by the time the loans need to be repaid. Good news is that there are some better alternatives that will be more cost effective in the long run.

In the past few decades, there has been a large increase in the number of federal student borrowers. From 1989 to 2012, that number has reached 385%. Of these borrowers, the percentage of Parent PLUS loans has gone from 4.1% to 19.9%. In addition to this spike in the quantity of borrowers using Parent PLUS Loans, the total amount of PLUS balances has grown 162% in the last few decades. Interest on these loans has doubled from $6,423 to $12,454. Parent PLUS Loans have become increasingly prevalent among borrowers. These federal loans may cause some issues for the parents of the borrowers.

One of the biggest draws to Parent PLUS Loans is that they can be used to cover the full yearly cost of attending college. This is appealing for many parents who need additional coverage for their child to attend college. However, the danger of pulling out large amounts of Parent PLUS Loans is that the interest rates stack up quickly. Another potential danger of taking out Parent PLUS Loans is how much they rely on the income of the parents. If the parent cannot repay the loans by the time they are due, then both the student and the parent are placed in a difficult financial position.

The average annual cost of college was about $30,320 in 2013 – 2014. Four years of college would cost about $121,280. If the parents of a student decided to take on a Parent PLUS Loan for all four years of school, they would also have to repay the large amount of interest on top of this massive cost. Luckily, there are some cost ­effective alternatives to taking out large sums of money through the Parent PLUS Loans. If the parents have already taken out some PLUS loans, there are some ways to avoid financial disaster.

Refinance
If the parents have already taken out PLUS loans, the option to refinance may be a great option. Refinancing parent PLUS loans would change these federal loans into private loans with new interest rates. To qualify, the borrower needs good credit and a higher income than the amount of debt. An important thing to keep in mind before deciding to refinance is that once these loans become private loans, they cannot be eligible for public debt forgiveness.

Transfer parent PLUS loans to student
Refinancing PLUS loans to the student’s name may be a better option if the student fits the criteria from lender companies. Transferring these loans to the child is a way to save the parents from financial burden.

Repayment Plan
Signing up for an income­ contingent repayment plan is a great way to save money and staying on track of monthly payments. This type of repayment plan crafts the bill to be 20% of the borrower’s annual income or the number that the borrower would pay on a fixed 12­year repayment schedule so that the payment plan suits the financial needs of the individual.

Debt Forgiveness
If the borrower is eligible, debt forgiveness is offered for any type of federal loan. After 10 years of working in public service, borrowers become eligible for debt forgiveness if they have not repaid their student debt. Parent PLUS loans on their own do not qualify for PSLF, but after consolidation they may be able to.

It is best in many circumstances for families to avoid taking out Parent PLUS loans. However, if a student and their parents have already taken out these loans, there are options that will save more money in the long run such as refinancing, transferring the loans to the student, enrolling in an income­ contingent repayment plan, or applying for debt forgiveness.

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