Can a Parent PLUS loan be transferred to the student? – Forbes Advisor

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Parent PLUS loans allow parents to take out student loans on behalf of their children in college. These federal loans can be a helpful source of funding for parents because they have lower credit requirements and more flexible repayment options than most private lenders.

However, after the student graduates, some parents want to transfer these loans to their adult children, or those children want to take over the debt from their parents. But can a PLUS parent loan be transferred to the student? It is possible, but not as easy as one might think. Here’s what to consider.

Can a Parent PLUS loan be transferred to the student?

There is no federal program that allows you to transfer a parent PLUS loan to the student who received that loan. If you take out a federal PLUS loan, you are responsible for it until it is paid in full.

However, there are other options if you are determined to transfer the debt. It is possible to refinance a parent PLUS loan on behalf of the student through a private lender. To refinance, the student can take on new debt to pay off their parent’s existing PLUS loan. The newly refinanced debt would be in the student’s name, and the student would make payments to the private lender.

However, refinancing federal student loans comes with its own set of risks and isn’t for everyone.

Advantages and disadvantages of refinancing a Parent PLUS loan on behalf of the student

Transferring a student loan from parent to student has some advantages, but there are also major disadvantages. Consider the following:

Advantages

  • Parents are no longer responsible for payments. Once the loan is removed from the parent’s name, they will no longer have to worry about payments. This can free up money in their budget and potentially improve their debt-to-income ratio (DTI).
  • Student can create their own credit profile. Newly graduated students may not have a great credit history, but making regular, on-time payments on student loans can help build it. The more on-time payments students make, the better they will turn to future lenders when buying a car or applying for a credit card.
  • You could get a lower interest rate than what you are currently paying. Parent PLUS loans tend to have higher interest rates than other federal loans. PLUS loans disbursed between July 2021 and July 2022, for example, have a fixed rate of 6.28%. If the student is a qualified borrower and refinances their debt, they could probably get a lower interest rate from a private lender.

The inconvenients

  • You will lose federal protections and benefits. If you refinance a parent PLUS loan, it will become private debt, which does not have the same benefits as a federal loan. For example, parent PLUS loans were automatically suspended during the Covid-19 pandemic. You will also lose federal student loan forgiveness options. Refinancing is irreversible, so make sure you won’t need these benefits before you take the plunge.
  • Less flexible repayment terms. Parent PLUS loans are eligible for certain federal repayment plans, which give you up to 25 years to repay the loan. If you refinance, your terms are based on the standards set by the lender. Most private lenders offer repayment periods of five to 20 years.
  • Parents might still need to be on loan. If the student doesn’t have a lot of credit history to their name, they might need a co-signer to complete the refinance process. If they don’t qualify on their own, a parent may have to co-sign the debt, meaning they would still be responsible for loan repayments if the student can’t pay.

Discuss your options with your child

If you took out a parent PLUS loan for your child and want to find other ways for them to pay off the debt, talk to your child about ways to both be happy with the payment plan. You might have more choices than you think, including:

  • Keep current loan. If the parent is having trouble making the payments or wants to share the responsibility with the student, consider a more informal arrangement. The student can make payments directly to the parent or add their bank account to the parent’s repayment plan. This allows you to retain federal protections on the loan while involving the student in the payments.
  • Refinancing a new loan in the name of the student. If the student has a strong credit profile, they can take over the debt by refinancing it as a loan in their name only. The parent is removed from liability, but it is now a private refinanced loan, not a federal loan.
  • Refinancing into a co-signed loan. If the student does not have a lot of credit history to their name, they may not qualify for a refinanced loan on their own. In this case, the parent can add their name as a co-signer to help the student qualify. Of course, you’d also be giving up federal protections in this case, but if you can get a low enough interest rate, the risk might be worth it.

How to Transfer Parent PLUS Loans to Student

If you’re about to turn your parent PLUS loan into a refinanced private loan, here’s how.

Shop around and compare lenders

Before completing an application, read the fine print; not all lenders will refinance a parent PLUS loan on behalf of the student. Lenders that offer it include:

  • SoFi
  • Road of laurels
  • CommonBond
  • PenFed Credit Union

Also consider whether the student can meet the lender’s qualification requirements. For example, most lenders will require the student to have graduated from school and can meet minimum credit and income requirements.

When you find a few lenders that suit your needs, compare them based on interest rates, repayment terms, and fees offered.

Prequalify, if possible

If the lender offers it, see if the student can prequalify for a refinanced loan. Enter some basic information about the applicant and their finances to see if they would qualify for a loan from a specific lender. You can see estimated interest rates and repayment terms without hurting your credit score.

If you can’t find a prequalification option, make sure your credit profile is top notch before completing a full application.

Consider co-signing, if needed

The student may want to take over the payments, but if they can’t qualify for their own loan, they’ll need a co-signer. Co-signing a loan means that you are responsible for the payments if your child does not make them. If they miss payments, you will both suffer a drop in your credit scores.

If you plan to co-sign the loan, review the lender’s policies and see if there is a co-signing waiver. With this option, the co-signer can be removed from the loan once certain conditions are met.

Submit an application and finalize the documents

Once you have found the best lender for your situation, complete the application. Have all of your documents ready, including recent tax returns, pay stubs, and identification, such as a driver’s license. If the loan requires a co-signer, the second applicant will also need to provide this information.

Each lender processes and manages applications differently; you may receive a response immediately or it may take a few days. Depending on your application, you may need to submit additional information to your lender before being approved.

The essential

While parent PLUS loan refinancing isn’t the best option for everyone, it does make sense in some situations. Consider refinancing if:

  • Your child wants to build credit with a student loan in their name.
  • You may get a lower interest rate than you currently have.
  • You don’t mind losing federal protections and benefits, such as flexible refund and forgiveness options.

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