Student loans are a burden on young adults, and increasingly on their parents, who may also take out student loans in their name to help finance their child’s education. Parents can face the same challenges that students do when trying to pay the loan back, and many parents look for ways to reduce what they owe.
Refinancing the loan is one option, but it’s not always the best idea. If you want a lower interest rate, you’ll have to look to private student loans because federal student loans charge everyone the same interest rates. That means forgoing some of the benefits and flexibility that federal student loans offer. Here’s a closer look at how parent student loan refinancing works and when you might want to consider it.
The two types of parent student loan refinancing
When you refinance a parent student loan, you have two choices: You can opt for a new loan in your name with a lower interest rate, or you can transfer the loan to your child. As I mentioned above, there’s no way to get a lower rate on a federal parent student, or Direct PLUS, loan. The interest rates are the same for everyone, and they’re fixed for the lifetime of the loan. The federal government also doesn’t permit you to transfer a Direct PLUS loan from parent to child. So whichever route you choose, you’ll have to go with a private student loan.
Private lenders offer different rates and repayment terms than the federal government and, much like when you’re buying a home or car, it pays to shop around to make sure you’re getting the best deal. Direct PLUS loans currently have a 7.6% interest rate, and this may rise for new loans issued after July 1, 2019. If you have decent credit, you may be able to find a private student loan that offers a more affordable rate. This could save you thousands of dollars in interest over the lifetime of the loan.
You’ll need good to excellent credit -- a score of about 670 or above -- in order to qualify for the best student loan interest rates, and your lender will do a hard credit check on your report when you apply to determine your eligibility. It’ll also look at your income to determine whether you can afford to keep up with the payments.
When you want to transfer the student loan to your child, the lender will look at his or her credit history and income. If he or she doesn’t have enough of a credit history to be approved for the loan, you may have to cosign. This won’t get you permanently off the hook, but it will make your child primarily responsible for the loan. You shouldn’t have to worry about making payments unless he or she is unable to keep up with them.
Why you may not want to refinance your parent student loans
Refinancing your Direct PLUS loans could save you quite a bit of money over the lifetime of the loan, but you should only do this if you’re comfortable giving up the federal student loan benefits.
Federal student loans often have more flexible repayment terms. Direct PLUS loans enable parents who cannot afford the standard 10-year repayment plan to consolidate their federal student loans and switch over to income-contingent repayment. This reduces your monthly payment to the lower of 20% of your discretionary income -- the difference between your income and 150% of the poverty guideline for your state and household size -- or the amount you’d pay if you had a 12-year, fixed-rate repayment plan.
Your private lender may not allow income-contingent repayment, and this could put you at a greater risk of defaulting on the loan if you cannot keep up with the regular monthly payments. Before accepting the private loan, you should note the standard monthly payment and all possible repayment terms to ensure you feel comfortable with them. If not, you may be better off sticking with the more flexible terms of your Direct PLUS loan.
You may also want to keep your federal student loan if you qualify for student loan forgiveness. This cancels out some of your student debt if you work for the government or a qualifying nonprofit organization that provides a public service for at least 10 years. You must make full, on-time payments during this period in order to qualify for the forgiveness, and not all loan types are eligible. Check with your lender to see if your qualify for student loan forgiveness. If you do, you’re better off consolidating your student loans with the federal government and working toward the student loan forgiveness, unless you don’t intend to work for an approved organization long enough to qualify for this benefit.
How to refinance your parent student loans
If you’re interested in refinancing your parent student loans, shop around and see what rates private lenders will offer you. Don’t worry about your credit score taking too much of a hit. Most credit scoring models consider all credit inquiries within a 30- to 45-day period as a single inquiry to account for normal credit-shopping behaviors.
Once you’ve gotten some offers, compare them to what you’re currently paying. The interest rate will determine how much you’ll pay over the lifetime of the loan. Many private student loans have variable interest rates, so it’s more difficult to predict how quickly the balance will grow. If your loan has a variable interest rate, see if there is a cap on how high rates can go.
If you can make the payments comfortably, the interest rate will be your primary concern, but if you worry about your ability to pay back what you borrow, you should also pay close attention to the loan’s repayment terms. Look for those that offer income-driven repayment options and deferments or forbearances for extreme circumstances, like unemployment, serious illness, or injury. It may be worth paying a slightly higher interest rate in order to have more flexible repayment terms. If you have any questions, ask the lender before you sign on the dotted line.
Refinancing can save you money over the long run and it may reduce your monthly payments, but it’s not the right decision for everyone. Look at your options carefully and talk it over with your child if you plan to transfer the loan to him or her. If you decide refinancing isn’t right for you, you can always explore alternative repayment plans and consider refinancing down the road if need be.