Did you take out a Parent PLUS Loan to help fund your child’s education?
If so, you can certainly be forgiven for wanting to transfer the loan from your name to your child’s. On average, parents who take out PLUS loans owe about $120 a month for every $10,000 borrowed for their child’s education.
While that can be manageable at first, it may be difficult to maintain those payments over time—especially if retirement is on the horizon. The solution may be to turn the repayment reins over to the graduate, who may be better equipped to manage the loan debt.
So the question is … what are you options for turning the loan over to your child?
How to “transfer” a parent PLUS loan to the student
Technically, as a parent, you can’t usually transfer the loan to your child. That is, the federal government will not allow you transfer responsibility of your federal loan to someone else.
But that doesn’t mean handing off the debt is out of the question.
A few student loan refinance companies, such as Laurel Road and SoFi allow parents to transfer PLUS loans to students.
However, you can also “transfer” the loan by having your child refinance the loan through any number of private lenders. By refinancing, the student will essentially take out a new loan with new loan terms to pay off the PLUS loan.
Each lender has its own eligibility requirements, but most lenders want your child to prove that they are financially capable of repaying the loan. To qualify, your child must have earned a bachelor’s degree or higher. The lender will also consider the type of degree they earned, the school they attended, and your child’s current income, career experience, and earnings vs. expenses. On the application, your child should mention that the current loan is in your name.
If your child is approved for the refinance, the lender will pay off current PLUS loans and issue a new loan with its own terms and conditions and, potentially, a lower interest rate. Your child then becomes responsible for repaying the loan.
Pros of transferring the loan to the student
Transferring a loan to the student whose education you helped fund will free you of debt that might be keeping you back. The monthly payments going to the PLUS loan can now go to a retirement fund—meaning you’re one step closer to being financially secure in the long run.
But it can also help your child in post-graduate life. Paying off student loans gives your child the opportunity to build his or her credit.
Additionally, your child may qualify for a reduced interest rate and monthly payment. The current interest rate on Parent PLUS Loans is 7% — which is high for federal student loans. Because the current refinancing rate is as low as 2.74%, having the student refinance the loan might be the best option.
Cons of transferring the loan to your child
When you refinance your Parent PLUS Loan, you can’t reverse the process. That means that once the loan is transferred the student, the debt is theirs to pay off.
For that reason, it’s important that your child is able to keep up with the payments. Help them understand the transfer’s financial and legal implications. Your child should know the total loan balance and calculate how much they would be able to afford as a monthly payment.
Then, when they apply for the refinance, you should work together to compare lenders and determine which interest rates and terms, borrower perks, and eligibility requirements are the best fit. Most lenders will conduct soft credit pulls to check your child’s eligibility and calculate interest rates, so it won’t affect his or her credit score.
Check our picks for the best banks for refinancing student loans.