Don’t let PLUS loans ruin your retirement

Your child maxed out on federal student loans, so you took out a Parent PLUS loan to cover their additional college costs. Now, you’re among 3.5 million families paying back a total of $83.9 billion on these loans.

Even worse, PLUS loan interest rates (7 percent) are much higher compared to other federal student loans. Between 2006 and 2010, rates on PLUS loans were as high as 8.5 percent.

If you’re carrying large parent PLUS loan debt, it could jeopardize your retirement. Let’s find out how to prevent this.

Big numbers

One student loan and bankruptcy lawyer represented a parent who racked up $353,000 in PLUS loans. The borrower was approaching retirement on a fixed income. The lowest repayment options were outlined like this:

  1. Pay $2,493 per month for 30 years for a total of $897,321, or
  2. A payment plan starting at $2,212 per month with increases up to $3,164 per month over 30 years – for a grand total of $958,171.

For anyone on a fixed income these numbers are staggering. Your situation might not be the same, but many are feeling the pinch. So what are your options?

Graduated and extended payment plans

Graduated plans allow you to start with low payments that gradually increase with time. If you have over $30,000 in either Direct Loans or FFEL Program Loans, you may also qualify for an Extended Payment Plan. This allows you to have lower payments over a longer term. Still, the numbers might end up looking like the ones we described in the case above. Before you apply for these plans, you might want to consider the ICR plan described next.

Income Contingent Repayment

If you’re struggling to make PLUS loan payments, you may be eligible for the Income Contingent Repayment (ICR) plan. To qualify, your minimum monthly loan payment must be at least 20 percent of your income.

Evaluate the ICR option before applying for a graduated or extended plan. The reason is that when you apply for ICR, you want to use the highest value possible as your minimum monthly loan payment. The value you get for graduated or extended plans might be too low. When calculating to see if you quality for ICR, use your current minimum monthly loan payment before any adjustments.

The other advantage to the ICR plan is that after 25 years, any unpaid debt is forgiven. The downside is that the amount of debt left over is treated as taxable income.

Deferment option

Parents must start making payments as soon as the PLUS loan is fully disbursed. Still, you can request to defer payments while your child is enrolled at least half-time and up to six months after their graduation. However, this is only a stopgap solution and may make things worse later. Why? During the deferment period interest continues to accrue on the loan.

Refinance for a lower rate

Private lenders might offer a lower interest rate than your PLUS loan rate. By refinancing your loan, you pay off the PLUS loan with a loan from a private lender with a better interest rate. For example, let’s say you have a $30,000 PLUS loan at 7% you’re paying back over ten years. You’ll pay $11,800 in interest If you refinance with a private lender at a fixed rate of 5%, you’ll cut your monthly payment by $30 a month and save about $3,600 over the life of the loan. That’s money that could be going in your retirement fund.

Take action

Even if you have significant debt from parent PLUS student loans, you still have options. Don’t let high interest derail your retirement plans. Do your homework and get the debt down to a manageable size.