Refinancing Direct PLUS Loans for Parents: Interest Rates and How to Do It

On average, parents borrow about $16,000 to send their children to school annually. That may seem like a manageable number, but it could have a big impact on your ability to reach your financial goals. 

Parents aren’t just prepping kids for school. They’re also:

• Running their household
• Paying down mortgages
• Saving for retirement
• Covering the cost of medical care

Several companies offer PLUS Loan refinancing options. And if you’re not sure if refinancing is for you, smart financial steps could keep you from drowning in debt. 

What Is a PLUS Loan?

Before we dive into the details of refinancing, let’s reiterate the details of Direct PLUS Loans for parents. You’ll need this data to make a smart decision about switching to a private loan company. 

A Direct PLUS Loan for parents comes straight from the U.S. Department of Education. Your college student also likely has a federal loan. Students get all sorts of perks, including:

• A low interest rate
• No service fees
• Income-based repayment options
• Loan forgiveness programs

If you’ve helped your child prep for college, you’ve probably recognized the benefits of these loans. And some do apply to you as a Direct PLUS borrower. 

PLUS Loans come with:

• A high interest rate. For the 2019-20 academic year, that rate stood at 7.08%. It won’t dip even if you have exceptional credit. 
• Loan fees. Every time you get a disbursement check, you’ll have to pay a charge of about 4%. 
• Legal responsibility. You’re borrowing money for your child. The U.S. Department of Education knows that, and so do you. But this loan stays in your name as a legal responsibility forever. 
• Steep consequences. These loans can’t be discharged in bankruptcy. If you don’t pay them, officials can garnish your wages and take other nasty steps to get their money back. 

For some parents, PLUS Loans offer a quick and acceptable way to help their children cover education costs. But these aren’t the same products children get. Parents should understand that – it might change your mind about accepting these funds. 

What if I Can’t Pay?

Life is unpredictable, and sometimes, loans you thought you could repay become burdens that overwhelm you. If you just can’t handle another bill, you do have options. But you won’t have as many choices as your child might. 

The U.S. Department of Education encourages parents in need to contact their loan companies. The government passes the administration of these products to private organizations, and they offer parents help in the form of:

• Smaller payments
• A temporary break
• An adjusted schedule

Even if your child has done well financially, you can’t swap legal responsibility. You signed for the loan, and it remains yours. 

If you took out more than one loan for your child, you could consolidate them. Doing so would make you eligible for a payment schedule that’s based on your income. But the U.S. Department of Education points out that consolidation comes with two real risks:

• Longer loan length: Time frame increases come with a bump in payments with interest. 
• Higher cost: Outstanding interest on the loans in the consolidation become part of the balance. That could lead to much higher fees. After all, now you’re paying interest on interest.

When Should You Refinance Privately? 

You can work with the U.S. Department of Education on Direct PLUS Loans. If you can’t cover your debts and you’re not sure what to do about it, a call to your loan servicer is always smart. Ignoring the problem never is. 

If you’ve talked with your loan servicer, and you find the help you’re given isn’t helpful at all, it could be time to look into loan consolidation.

Companies That Handle Parent Loan Refinancing 

Just as your child could go to a private organization for student loans, you can do the same when you run into trouble with a PLUS Loan. The three companies we’re featuring here all have products made for families like yours. 

Companies that specialize in Direct PLUS Loan refinancing include:

• SoFi. This company offers a refinancing program with a fixed interest rate of 3.46% APR. You won’t pay a fee to apply. You’ll need to qualify for this loan, and that means you’ll need good credit.
  
  If you’ve already defaulted on a PLUS Loan, that could get tricky. But if you have a decent score, you can qualify in minutes, and you can move through the whole process online.
• Laurel Road. This company offers a refinancing product with fixed interest rates between 3.50% and 7.02% APR. Choose an aggressive repayment schedule (such as five years instead of 20), and you’ll pay less.
  
  These loans come with perks, including a cash bonus for referring a friend. Best of all, if your child qualifies, you can use this company to transfer your Direct PLUS Loan balance to your child’s financial responsibility.
• Earnest. Refinance with this company, and you’ll get a fixed interest rate starting at 3.45% APR. You’ll choose your repayment option, and you can shift your schedule at any time to pay the balance off quicker.
  
  Make extra payments without fees and skip payments (as long as you make them up later). Enroll online in just a few minutes. 

Your local bank or credit union might also offer refinancing programs, but make sure to ask about the details before you accept. You might find that a company specializing in student loans offers perks standard banks do not. 

How Can You Reduce Your Risk? 

No one wants to think about struggling to pay for a child’s education Defaulting on a parent loan – or moving money from one bank to another – is certainly unpleasant. It’s understandable. Thankfully, it’s also preventable. 

If you must borrow to help finance your child’s education, be sure to:

• Start payments immediately. PLUS Loan interest starts accruing immediately. The less you pay, the more you’ll owe down the line. As soon as you get the check, start paying back your debt.
• Research before you sign. You have options. Don’t accept a Direct PLUS Loan before you examine all the loan products companies might have available. Analysts point out that PLUS Loans come with steep interest rates, and that private lenders sometimes provide a better deal. That’s especially true if you have good credit.

Work with your child. If you accept a loan, talk as a family about how to pay back that debt. Perhaps you refinance and move the entire balance to your child’s ledger. Or you could work through an informal arrangement and let your child log onto the account and make payments.