6 pros and cons of refinancing parent PLUS loans

As a parent, you want what’s best for your child. That often means a top-notch education, including a bachelor’s degree. However, the cost of college has skyrocketed in recent years, and few families can cover the expense with just their savings. According to a report from the Brookings Institute, 3.4 million borrowers owe over $87 billion in federal Parent PLUS Loans.

Carrying student loan debt as a parent can have significant consequences, affecting everything from your target retirement age to whether or not you can get approved for a mortgage. If you need some relief, refinancing your parent student loans can make a lot of sense, but it’s not for everyone and you are still subject to credit qualification. Here’s what you need to consider before refinancing your debt.

Read more: How to Refinance Your Parent PLUS Loans

Benefits 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.

If you’re thinking of refinancing your parent student loans, there are several benefits to keep in mind:

1. Refinancing could save you money

If you have good credit and a stable income, you could qualify for a refinancing loan 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 7.08% interest and 10 years left of repayment. Over the course of your repayment, you’d repay a total of $41,948. Interest charges would cost you nearly $12,000.

But if you refinanced your loans and qualified for a 10-year loan at 3.45% interest, you’d repay a total of just $35,515. You’d save over $6,400 by refinancing your debt.

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, and can 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, instead. By doing so, you’ll be able to dramatically reduce your monthly payment.

Drawbacks to Refinancing Parent 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:

4. 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.

Read more: Understanding Parent PLUS Loan Forgiveness Programs

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.

5. You won’t qualify for Public Service Loan Forgiveness

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 employer.

However, private loans aren’t eligible for PSLF. If you refinance your Parent PLUS Loans, you’ll no longer qualify for loan forgiveness.

6. 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 budget.

Tackling Your Debt

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 refinancing your loans makes sense for you, you can get a rate estimate from Earnest in just minutes without impacting your credit score.

This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1 Please note that you may lose benefits associated with your underlying federal loans, such as federal Income-driven Repayment Plans (an example of which is the SAVE plan), Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options, if you refinance into a private loan. If you file for bankruptcy, you may still be required to pay back this loan.

2 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 the total cost of your refinanced loan.

3 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.

4 Earnest clients may skip a payment through a one, one-month forbearance during a 12 month period. Your first request to skip a pay can be made once you’ve made at least 6 months of consecutive on-time full principal and interest payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Any unpaid accrued interest may capitalize (added to the principal balance) at the end of the forbearance period by adding unpaid accrued interest to the outstanding principal as permitted by law and the terms of the loan agreement.

Interest will not be capitalized on loans originated to Michigan residents under the Regulatory Loan Act of 1963. Please be aware that a skipped payment does count toward the forbearance limits. Please note that skipping a payment is not guaranteed and is at Earnest's discretion. Your monthly payment and total loan cost may increase as a result of postponing your payment and extending your term.