7 Proven Strategies to Slash Parent PLUS Loan Interest and Repay Faster

Paying for a child’s college education is one of the most significant financial commitments many parents make. The federal government’s Parent PLUS loans are a popular way to bridge the gap between tuition costs and available funds.

 

However, with an interest rate currently set at 8.05%, these loans can be costly over time. Finding ways to accelerate repayment and minimize interest costs is crucial for parents looking to save money and achieve financial freedom sooner.

 

This comprehensive guide explores several strategies to help you manage and repay your Parent PLUS loans effectively.

 

We will discuss methods such as making payments while the student is still in school, refinancing options, and taking advantage of employer repayment assistance programs. We will also examine the potential risks of refinancing and the importance of understanding the trade-offs involved.

 

The Challenge of Parent PLUS Loans: High Interest Rates

 

 

Parent PLUS loans are federal loans that allow parents to borrow money to cover their child’s college expenses. While these loans can be a valuable resource, they come with a significant drawback: a high fixed interest rate.

 

As of the 2023-2024 academic year, the interest rate for Parent PLUS loans is 8.05%, the highest of all federal student loans. This means that over time, the cost of borrowing can add up substantially, making it essential for parents to find ways to reduce the overall cost of these loans.

 

Strategy 1: Make Payments While the Student Is Still in School

 

One effective strategy to reduce the amount of interest that accrues on a Parent PLUS loan is to start making payments while the student is still in school. Typically, Parent PLUS loans are deferred while the student is enrolled at least half-time, meaning that no payments are required during this period. However, interest continues to accrue, and when the deferment period ends, the accrued interest is capitalized—added to the principal balance—resulting in higher overall costs.

 

By making even small monthly payments during the deferment period, parents can reduce the amount of interest that accrues and prevent it from being capitalized. For example, if you make a payment of $50 per month while your child is in school, you can significantly lower the principal balance by the time repayment begins. Over the life of the loan, this can save you a considerable amount of money in interest.

 

Strategy 2: Public Service Loan Forgiveness (PSLF) for Parents

 

Public Service Loan Forgiveness (PSLF) is a federal program designed to forgive the remaining balance on Direct Loans after the borrower has made 120 qualifying monthly payments while working full-time for a qualifying public service employer. This program is not only available to students but also to parents who have taken out Parent PLUS loans, provided they meet specific criteria.

 

To qualify for PSLF, parents must consolidate their Parent PLUS loans into a Direct Consolidation Loan and enroll in an income-driven repayment (IDR) plan. They must then make 120 qualifying payments while working full-time for a government or nonprofit organization. After ten years of qualifying payments, the remaining balance on the loan can be forgiven.

 

For parents working in public service, PSLF offers a pathway to forgiveness that can dramatically reduce the financial burden of Parent PLUS loans. However, it’s important to understand that eligibility requires strict adherence to the program’s requirements, including making on-time payments and working for a qualifying employer throughout the repayment period.

 

Strategy 3: Refinancing Parent PLUS Loans into the Student’s Name

 

If your child has graduated and is now working, another option to consider is refinancing the Parent PLUS loan into the student’s name. This can be done by transferring the loan to a private lender, effectively shifting the responsibility of repayment from the parent to the student. This option may be particularly appealing if the student has established good credit and qualifies for a lower interest rate than the original Parent PLUS loan.

 

Refinancing into the student’s name can reduce the interest rate and lower the monthly payment, making it more manageable. However, it’s essential to weigh the pros and cons carefully. While this option can provide relief for parents, it transfers the financial responsibility to the student, which may not always be desirable or feasible, depending on their financial situation.

 

Strategy 4: Making Extra Payments Above the Monthly Minimum

 

One of the most straightforward and effective ways to accelerate the repayment of Parent PLUS loans is to make extra payments above the required monthly minimum. Even small additional payments, such as an extra $25 to $50 per month, can significantly reduce the total interest paid over the life of the loan and shorten the repayment period.

 

 

For instance, consider a Parent PLUS loan with a balance of $30,000 at an interest rate of 8.05%. If the minimum monthly payment is $364 and you decide to pay an extra $50 per month, you could save thousands of dollars in interest and pay off the loan years earlier. Here’s a simplified breakdown:

 

• Minimum Payment Only: Pay off in approximately 10 years with total interest of around $13,680.
• Minimum Payment + $50 Extra: Pay off in approximately 8.5 years with total interest of around $10,900, saving nearly $2,780 in interest.

 

These savings can add up, especially when consistently making extra payments over several years. This strategy allows you to take control of your loan repayment and reduce the financial burden more quickly.

 

Strategy 5: Employer Student Loan Repayment Assistance Programs

 

Some employers now offer student loan repayment assistance as part of their benefits package. These programs can provide significant financial support by helping employees pay down their student loans, including Parent PLUS loans. Typically, employers offer a monthly or annual contribution toward the employee’s loan balance, which can accelerate repayment and reduce the overall interest paid.

 

If your employer offers such a program, it’s worth exploring how it can be applied to your Parent PLUS loans. Even if the assistance is modest, such as $100 per month, it can make a meaningful difference over time. This benefit is especially valuable as it doesn’t require any additional financial commitment on your part beyond what your employer contributes.

 

Strategy 6: Signing Up for Auto-Pay to Lower the Interest Rate

 

Another simple but effective strategy to reduce the cost of your Parent PLUS loan is to sign up for auto-pay. Many loan servicers offer a 0.25% interest rate reduction for borrowers who enroll in automatic payments. While this may seem like a small discount, over the life of the loan, it can lead to significant savings.

 

For example, on a $30,000 Parent PLUS loan with an 8.05% interest rate, enrolling in auto-pay and reducing the rate to 7.8% could save you several hundred dollars in interest over the repayment period. Additionally, auto-pay ensures that your payments are always made on time, helping you avoid late fees and potential damage to your credit score.

 

Strategy 7: Refinancing Parent PLUS Loans to a Private Loan with a Lower Interest Rate

 

Refinancing Parent PLUS loans to a private loan with a lower interest rate is another option for reducing the total cost of borrowing. If you have a strong credit history and meet the eligibility criteria, refinancing can lower your monthly payments and reduce the total interest paid over the life of the loan. This is particularly beneficial if you can secure a fixed interest rate lower than the current federal rate of 8.05%.

 

For example, if you refinance a $30,000 Parent PLUS loan at a 5% fixed interest rate over 10 years, your monthly payment could drop significantly, and you could save thousands in interest compared to sticking with the original federal loan terms.

 

ELFI as a Refinancing Option

 

One lender that offers refinancing for Parent PLUS loans is Education Loan Finance (ELFI). ELFI provides competitive rates and flexible repayment terms, making it a popular choice for parents looking to lower their monthly payments and overall costs through refinancing. By working with ELFI, borrowers may be able to secure a lower interest rate, which can lead to substantial savings over the life of the loan.

 

However, it’s crucial to understand the potential risks associated with refinancing federal loans into private loans. When you refinance a Parent PLUS loan with a private lender like ELFI, you lose access to federal benefits, such as income-driven repayment plans, deferment and forbearance options, and federal forgiveness programs like PSLF. Therefore, it’s essential to weigh these trade-offs carefully before deciding.

 

Understanding the Risks of Refinancing Parent PLUS Loans

 

 

While refinancing can offer financial benefits, it’s important to consider the potential risks and downsides. Refinancing a Parent PLUS loan with a private lender means giving up federal loan protections and benefits. Here are some key risks to keep in mind:

 

• Loss of Federal Benefits: Once you refinance your Parent PLUS loan into a private loan, you lose access to federal benefits like income-driven repayment plans, deferment options, and potential forgiveness programs like PSLF. These benefits can provide essential financial flexibility, especially during periods of financial hardship.

• Change in Financial Situation: If your financial situation changes after refinancing—such as job loss or unexpected medical expenses—you may have less flexibility with a private loan. Private lenders typically do not offer the same level of assistance as federal loans, meaning you could be required to make full payments even during difficult times.

• Higher Interest Rates in the Future: If your credit score drops or market interest rates rise in the future, you could face higher interest rates for future borrowing. Federal loans have fixed rates, so the interest rate will not increase over time, providing a level of predictability that private loans may not offer.

• Fees and Additional Costs: Private lenders may charge various fees, such as application fees, disbursement fees, or prepayment penalties. These additional costs can reduce your actual savings and make refinancing less beneficial than initially anticipated.

• No Ability to Transfer Loans Back to Federal: Once you refinance a Parent PLUS loan with a private lender, you cannot transfer it back to the federal system. This means you would no longer have access to programs like income-driven repayment or forgiveness options if needed in the future.

 

Weighing the Benefits and Risks

 

Parent PLUS loans, with their high-interest rates, can be a significant financial burden for many families. However, by exploring various repayment strategies and considering refinancing options, parents can take control of their debt and potentially save thousands of dollars in interest.

 

Making payments while the student is still in school, considering Public Service Loan Forgiveness, making extra payments, and exploring employer repayment assistance programs are all effective ways to accelerate repayment. Additionally, signing up for auto-pay can provide an immediate interest rate reduction, while refinancing with a private lender like ELFI can offer long-term savings.

 

However, it’s essential to carefully weigh the potential risks of refinancing, including the loss of federal benefits and the possibility of higher future interest rates. Every family’s financial situation is unique, so it’s crucial to consider your long-term goals and financial stability when deciding on the best repayment strategy for your Parent PLUS loans.

 

By understanding the options available and making informed decisions, parents can reduce the burden of Parent PLUS loans and move closer to financial freedom.