Alternatives To Transferring a Parent PLUS Loan to a Student

As the cost of attending college rises an average 7% annually, according to the Education Data Initiative, many parents consider federal parent PLUS loans as a viable financial strategy to manage their child's education expenses.They can help fill gaps that other financial aid doesn't fully cover. But once you're approved for a parent PLUS loan, you're legally responsible for repaying it.

If you want to transfer that responsibility to your child once they can afford to make the payments, you cannot do so under U.S. Department of Education rules. However, refinancing these loans through a private lender is an option you can consider.

This guide covers how to refinance parent PLUS loans, the pros and cons, and alternatives to consider.

How to transfer a parent PLUS loan to a student

While you can't directly transfer a parent PLUS loan to a student, the loan can be refinanced in a couple of different ways.

Refinancing a parent PLUS loan

If you're looking for ways to lower your interest rate, reduce monthly payments, or transfer responsibility to your child, refinancing a parent PLUS loan with a private lender is an option. But, it's important to know the trade-offs before making a final decision.

1. Research private loan lenders: Shop around to compare the lenders that can help your child find the best loan for their situation. In addition to finding the lowest interest rates, it's important to consider repayment terms, fees, and eligibility requirements. You can typically prequalify on a lender's websites without affecting your credit.

2. Complete the loan application: Your child will need to complete an application and be prepared to provide documentation like tax returns and pay stubs to verify their income. If you're a cosigner, you'll also need to provide documentation.

3. Continue making payments: If your child is approved for the loan, don't stop making payments on your PLUS loan just yet. Wait until the refinance is finalized, otherwise you might see a ding to your credit score if you miss an expected payment.

Parent PLUS loan student refinancing

Your child can refinance a parent PLUS loan by applying for a new private student loan in their own name instead of yours. The catch is that most private student loan lenders require good credit or a cosigner who does. That means you could still be on the hook for repaying the loan, you just aren't listed as the primary borrower.

You'll have the opportunity to potentially lower your interest rate, adjust the loan terms, or consolidate your parent loans into one monthly payment.

As a cosigner to the new loan, you still have a legal obligation to repay the loan (if your child doesn't). Many lenders offer a cosigner release option after your child makes a certain number of on-time payments, but the option varies by lender.

Not all lenders allow students to refinance parent PLUS loans in their names, but these lenders are some of the few that do:

ELFI

ELFI is one of the best private loan lenders for refinancing parent PLUS loans, as long as your child can meet the eligibility requirements. It includes a minimum annual income of $35,000, a minimum credit score of 680, and at least a credit history of 36 months. Additionally, they must have at least $10,000 in student loan debt to refinance and have graduated with a bachelor's degree from an accredited school.

SoFi

After successfully graduating, students can refinance their parents' PLUS loans with SoFi, which makes the process easy when they meet eligibility requirements. They must have at least $5,000 in student loan debt and be either employed or have an offer of employment to start within 90 days, or have sufficient income from other sources.Other requirements include their financial history, credit score, and debt-to-income ratio (DTI).

Nelnet Bank

Nelnet Bank offers competitive rates for refinancing parent PLUS loans after your child has graduated with a bachelor's degree or higher. They must also have a steady income or apply with a qualified cosigner and have a minimum credit score, although Nelnet doesn't disclose what that is.

Earnest

Parents can refinance parent PLUS loans with Earnest after the student graduates from college, provided they have at least $5,000 in student loans to refinance (the minimum for California residents is $10,000 and New Mexico residents is $10,001). Additional eligibility requirements include good credit history and a minimum credit score of 665, consistent income, and an acceptable DTI.

Pros and cons of transferring parent PLUS loans to a student

Every financial decision has advantages and disadvantages. Before transferring or refinancing a parent PLUS loan to a student, consider both sides of the equation.

One advantage to parents is a reduction in loan payments showing up on their credit report, which can make it easier to qualify for other loans such as a mortgage, explains Jack Wang, a wealth adviser specializing in college financial aid at Innovative Advisory Group.

That's because refinancing in the student's name means the parent is no longer responsible for loan repayment, unless they cosigned on the new loan.

“Keep in mind that parents can still help the student with the monthly payment, though. Parents just wouldn't be required to make payments,” Wang says. Additionally, the student can use the opportunity to make on-time payments to build their credit.

But for many students, qualifying for a refinanced loan through a private lender without a cosigner represents a significant challenge. Typically, students with no or poor credit need a cosigner to get approved for the new loan. If the student can qualify for the refinance, with or without a cosigner, moving to a private student loan also comes with a loss of federal protections.

“A private refi loses the superior benefits of federal education loans, such as longer deferments or forbearances, income-driven repayment plans, death and disability discharges, and loan forgiveness options,” explains Mark Kantrowitz, author of “How To Appeal for More College Financial Aid.”

Alternatives to transferring a parent PLUS loan

Students who want the responsibility of repaying a parent PLUS loan can refinance it in their name through a private lender. Alternatively, you can ask your child to help repay the parent PLUS loan, even though the loan will remain in your name. But there are also other options that can help with parent PLUS loan repayment.

Parent PLUS loan consolidation

If you're looking to lower your payment obligations, applying for the Income-Contingent Repayment (ICR) Plan can help. After consolidating your parent PLUS loan with a Direct Consolidation Loan, you can apply for the ICR Plan. Under this plan, your payment will equal the lesser of 20% of your discretionary income or what you'd pay on a fixed plan over a 12-year term, adjusted to your income.

Parents with a high income might see their monthly payment rise beyond the amount associated with the 10-year Standard Repayment Plan. But if ICR offers a lower payment, this might be a good option for you.

Parent PLUS loan forgiveness

Loan forgiveness is another avenue that's worth pursuing. As a parent PLUS borrower, you can qualify for forgiveness after completing the 25-year repayment term. You may qualify for Public Service Loan Forgiveness if you work full-time for a government agency or qualifying not-for-profit organization and make 120 payments under the ICR Plan after consolidating with a Direct Consolidation Loan.

Make payment arrangements with your child to repay the loan

Instead of refinancing, parents and students can agree on an arrangement where the student helps pay without transferring the loan, even though the loans remain in your name.

“It might be better to have a side agreement where the student agrees to make the payments on the parent PLUS loan, sending the money to the parent who then sends the money to the loan servicer,” says Kantrowitz.

This option leaves the repayment burden on you as the parent. Although this arrangement puts no legal responsibility on your child's shoulders, they may opt to help you repay the loan this way. If you want to go this route, consider having an open and honest conversation about your financial situation and goals with your child.

“That way, the parent remains in control and can make sure that the payments are made on time,” he adds.