Source: The College Investor
Can You Transfer A Parent PLUS Loan From A Parent To A Child or Student?
This question is about parent PLUS loans.
Key Points
- Direct transfer of Parent PLUS loans to students isn’t possible through federal programs.
- Refinancing with private lenders can shift the loan to the student’s name but comes with risks and requires the ability to qualify for a private loan.
- Families should discuss the broader estate planning issues around shifting this debt and decide if it's even worthwhile.
When Maria Rodriguez’s son graduated from college, she hoped to pass on more than just wisdom. Having shouldered significant Parent PLUS loans to finance his education, Maria wondered if she could transfer this debt to her son, allowing him to take responsibility?
Parent PLUS loans, federal loans taken out by parents to support their children’s education, offer several repayment options and lenient credit requirements. However, this debt legally belongs to the parent, even after the student graduates.
So, is there a way to shift this financial obligation to the student? And more importantly, should parents even consider this?
Understanding Parent PLUS Loans
Parent PLUS loans are federal student loans that are taken about by the parent in order to pay for a child's college. It's important to note that Parent PLUS loans are solely the legal responsibility of the parent. The child has no legal obligation to pay these loans.
However, some families do create "informal" plans where the child may pay the loans, but these aren't legally binding. Furthermore, they may also not be the most financially savvy approach.
The federal government does not offer a program to transfer Parent PLUS loans directly into a student’s name. Parents remain legally responsible until the loan is fully repaid.
However, there’s a workaround: refinancing through a private lender.
By refinancing, the student takes out a new loan themselves to pay off the existing Parent PLUS loan. This new loan is solely in the student’s name, releasing the parent from the obligation. Lenders like ELFI, Laurel Road, and LendKey offer such options. But this route isn’t without pitfalls.
Pros And Cons Of Refinancing A Parent PLUS Loan
Refinancing can potentially lower the interest rate, especially since Parent PLUS loans often carry higher rates than other federal loans. It also allows the student to build their credit history through consistent repayments.
However, refinancing federal loans with a private lender means losing federal student loan benefits.
Benefits like income-driven repayment plans, deferment options, and potential loan forgiveness are lost. Additionally, private loans may offer less flexible repayment terms and could require a co-signer if the student lacks sufficient credit history. And if you're the parent, cosigning the loan basically puts you back into the same situation as simply having a PLUS Loan.
Estate Planning Considerations
This may sound counter-intuitive, but there are estate planning considerations to think about for families wanting to repay these Parent PLUS Loans. What this means is that there may be an opportunity for the entire family to be wealthier by NOT paying these loans off.
Parents can leverage the Borrow and Die Parent PLUS Loan Strategy, where they defer the loans as long as possible, make as low a payment as legally allowed, then receive loan forgiveness after 20 years or death.
While this may sound shocking, the goal is that family wealth grows and isn't sent to the government if not legally required. For parents that can take advantage of this, their children don't need to waste their money repaying loans that would eventually be forgiven.
Navigating this underscores the need for open family dialogues about money and estate planning. Discussing responsibilities, expectations, and future plans can prevent misunderstandings and financial strain.
While transferring a Parent PLUS loan to a student isn’t straightforward, options like refinancing exist but require careful consideration. Families should weigh the benefits against the potential loss of federal protections and engage in honest conversations about their financial futures.
Don't Miss These Other Stories:
Editor: Colin Graves
Robert Farrington is the founder of The College Investor and is widely recognized as one of the nation’s leading voices on student loan debt and saving for college. He holds an MBA from UC San Diego Rady School of Management and has spent over 15 years researching, writing, and advising on student loans, 529 plans, financial aid programs, and saving and investing for young professionals.
Robert has been featured in the The New York Times, The Wall Street Journal, The Washington Post, NBC News, and Forbes, where he has been a regular personal finance contributor for over a decade. His work combines both professional expertise and personal experience – he successfully navigated his own student loan repayment journey and has helped thousands of readers do the same.
He is committed to making the intersection of personal finance and education transparent and accessible. You can learn more about Robert on the About Page or on his personal site RobertFarrington.com.