When it comes to helping Neela Hummel’s mother-in-law repay the parent PLUS loans she borrowed years ago for her son’s schooling, the family has an informal arrangement.
Neela and her husband Tom regularly log into his mother’s account and make payments with their own funds, tackling the nearly $30,000 in PLUS loans remaining after Tom’s 2007 graduation from California State Polytechnic University–Pomona.
The couple feel responsible for the debt since the money paid for Tom’s education and would like to formally take over repayment. “We’re both set in our careers and we’re trying to clean this up as much as we can,” says Neela, who works as a financial advisor.
But they won’t get far with the federal government, which doesn’t allow parents to hand off PLUS loans to their children. “A direct PLUS loan made to a parent cannot be transferred to the child. You, the parent, are responsible for repaying the loan,” says the Department of Education’s student loan website. The workaround: Using a private loan refinancing company to bypass the feds.
With this strategy, the child refinances the parent PLUS loan into a private student loan, transferring the debt into the student’s name in the process. The PLUS loan goes away, repaid by the child’s new private loan, with new terms and conditions.
Learn about the risks and rewards of [private student loan refinancing.]
Of the six lenders U.S. News reached out to, just two — DRB and SoFi — allow students to take responsibility for a parent’s PLUS loan this way.
“We were one of the first would be my guess,” says Jenny Chou, chief strategy officer of DRB, formerly called Darien Rowayton Bank, which has offered this transfer option since November 2014. “We are one of the rare unicorns doing this.”
SoFi, another private student loan refinancing company, has made this arrangement possible for students and parents since 2014, says Dan Macklin, co-founder and vice president of business development at SoFi. “But we don’t necessarily publicize it,” he says.
Taking this approach has some benefits for families — and some risks. Here’s what to know about the process.
— The loan will lose federal protections. Parent PLUS loans are federal loans, with federal protections, including Public Service Loan Forgiveness, death and disability discharge and forbearance.
Discover four strategies for repaying [federal parent PLUS loans.]
Companies like DRB and SoFi don’t guarantee these federal benefits and protections. Instead, they have their own policies when it comes to dealing with monthly bills and easing financial hardship — and that’s a risk for the student taking on the new loan.
Transferring the debt may also overburden a student who’s gearing up to qualify for a mortgage, contribute to a retirement plan or start college savings for their own children, said Joshua Cohen, a Vermont-based attorney who focuses on student loans, in an email.
Cohen is wary of the technique, especially since parent PLUS borrowers who’ve consolidated into the direct loan program can repay through an income-contingent plan, paying nothing when in retirement, and have the debt forgiven after 25 years. “There is simply no advantage to refinancing a Parent PLUS loan into the student’s name and credit,” says Cohen, who says that when parents sign the promissory note, they’re committed to repaying the loan.
Prepare to ask these three questions before [refinancing student loans.]
— The child must qualify. This isn’t a strategy for a student still in school. To take over the parent’s loan, a child typically must demonstrate that he or she has a bachelor’s degree, good credit and a low debt-to-income ratio. “We don’t want to be lending to people who can’t afford to pay it back,” says Macklin, of SoFi.
Applicants are evaluated on a case-by-case basis, says Chou, of DRB. But when it comes to credit score, “I would say we look at the higher ends of 600s,” she says.
One benefit from taking on a new loan: A new interest rate. Older parent PLUS loans have rates as high as 8.5 percent. A student with a good financial record may see that lowered by several percentage points.
— Parents should still be prepared to pay. While this method can work for some families looking to hand off a parent PLUS loan to the child, borrowers shouldn’t count on it. “I’d never want to counsel anyone with the logic that, ‘Hey you can give that loan to your child — no big deal,'” says Chou.
Parents may still need to repay their PLUS loans while their children get set financially in the months or years after college. And while students may feel a moral obligation to take on their parents’ PLUS loans since the money funded the students’ education, “don’t confuse this with legal obligation,” says Cohen, the student loan lawyer. Parents can’t force their child to adopt responsibility for the loan. It’s ultimately Mom and Dad’s debt.
Trying to fund your education? Get tips and more in the U.S. News Paying for College center.
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Learn How to Transfer Parent PLUS Loans to a Child originally appeared on usnews.com