You may have heard of Public Service Loan Forgiveness (PSLF) before. Did you know that you’re (technically) eligible for PSLF if you have Parent PLUS loans? Most parents have struggled to understand the financial aid process. For good reason – it’s a confusing process filled with twists and turns. In this article, we’ll explain two key terms, Parent PLUS loans and PSLF, and how you can qualify for Public Service Loan Forgiveness with Parent PLUS Loans.
Understanding PLUS Loans
Parent PLUS Loans are part of the Direct Loan Program. These loans are issued direct from the federal government (US Department of Education). They’re similar to the Direct Loans for Dependent Students, but also have some key differences. First, they’re solely in the parents’ name, not the student. This is an important factor for a number of reasons. In particular, the parent is not a co-signor, but the actual signor.
Another difference is the fee & interest rate attached. Parent PLUS loans have an origination fee (currently at 4.228%). This means that for every $10,000 of a Parent PLUS loan you borrow, $422.80 gets tacked on immediately. The interest rate is tied to the 10 year treasury, plus a fixed margin of 4.6%. Therefore, these loans will nearly always be higher than the Direct Loans in the students’ name.
You can also borrow up to the full cost of attendance, which may or may not be a good thing. Yes, it’ll allow you to fund the cost of college. But it can also create an albatross on retirement. If you do this, or plan to, you must have an exit strategy. That’s where PSLF could come in to play.
Public Service Loan Forgiveness
The Public Service Loan Forgiveness program allows borrowers who work in the public sector to have a loan amount forgiven. There are numerous boxes you need to check, and the government site lays them out nicely. But this process can provide help and assistance for numerous borrowers.
While it typically has been understood that student borrowers are the ones eligible, Parent PLUS loan borrowers are too. But there’s a catch (and process to this). Parent PLUS loans themselves aren’t eligible for forgiveness, but they are eligible for consolidation. Consolidation loans are eligible for forgiveness. Let’s unpack a bit more.
How to Turn Parent PLUS Loans into Consolidated Loans
Generally speaking, PLUS loans can become a consolidated loan, which creates eligibility for PSLF. This consolidation process allows borrowers to go from “A Parent PLUS Loan” to a “Direct Consolidation Loan.” When it comes to Parent PLUS loans, they’re eligible for consolidation into an income-contingent repayment plan. You can find those repayment options here.
Once these loans have been consolidated, they are then eligible to go onto PSLF. Of note, the PSLF doesn’t start when you take the loans out, but after you consolidate.
Another Advanced Strategy
While the income-contingent repayment plan is a solid plan to repay consolidated PLUS loans, it’s not the best repayment strategy. One way you can lower your monthly payment and increase the amount you’re eligible for PSLF is to do the double consolidation strategy.
To be clear, this an advanced strategy that takes multiple PLUS loans, and consolidates the loans not once, but twice. Why would you do this? To enter into a more favorable repayment plan!
Weird as this may sound, a consolidation loan that pays off a Parent PLUS loan still has that PLUS coding to it. But if you consolidate twice? The PLUS loan coding drops off, thus allowing you to be eligible for the other (and more favorable) repayment options.
A helpful article that explains a bit more can be found here. Regardless, this strategy is one that requires planning and the right fit – so make sure to speak to a CPA and fee-only, fiduciary financial planner who can help with this process.
EDIT: This “double consolidation” strategy is going to sunset in July of 2025.
Conclusion
PLUS Loans can be helpful for parents, but they can also be dangerous to a financial plan. It is completely dependent on their usage. If you are planning on taking advantage of Public Service Loan Forgiveness with Parent PLUS Loans, it is highly recommended you do your research beforehand. Mistakes made on the consolidation strategy of the PLUS loans and/or recertification strategy of the PSLF can create headaches.
Checking and knowing your eligibility of these plans and the strategy behind them is paramount.
