Your Guide to Parent Plus Loan Forgiveness

Parent Plus Loan Forgiveness
Parents have always had an interest in helping their children get through college. As tuition costs have gone up in recent history, parents are even more involved in the process, even taking on debt on behalf of their children.

People over age 60 are the fastest-growing segment of student loan borrowers in America; in fact, there are 7.7 million people over age 50 accounting for $284.6 million in student loan debt. Much of that debt is because of the Parent PLUS Loan program.

Parent PLUS Loans are federal loans take out by parents or legal guardians. They take them out to help their children pay for undergraduate studies. As of Q4 of 2018, there have been 3.6 million Parent PLUS loans, accounting for $89.9 million in debt.

The challenge with Parent PLUS Loans

Most parents don’t want their child to struggle with debt after graduation which is a very generous act. But Parent PLUS Loans aren’t always a great solution. They can be troublesome to pay back for parents closing in on their retirement age.

Some parents don’t end up with that much debt, but I’ve seen other parents with upwards of $200,000 to $300,000 in Parent PLUS Loan debt. This is generally due to paying for expensive private school tuition. Another killer is paying college costs for more than one child.

If you have Parent PLUS Loans or are thinking about them, here are some details about a Parent PLUS Loan you need to know:

  • It has a fixed interest rate, currently set at 7.6%.
  • It has an origination fee.
  • It is not subsidized. This means interest starts to accrue as soon as the loan funds are disbursed.
  • It does not come with a grace period. Repayment starts as soon as funds are disbursed.
  • It is made in your name and you have sole responsibility for repayment.
  • Its borrowing limit is equal to the cost of attendance. Unlike Stafford loans that are subject to strict limits, Parent PLUS loans have no such limit.

Are there loan forgiveness options for Parent PLUS Loans?

Here’s one of the first questions I get about Parent PLUS Loans: “Is there loan forgiveness for Parent PLUS Loans?” No, there isn’t.

This loan isn’t eligible for any kind of income-driven assistance or loan forgiveness. However, there is a loophole parents can take advantage of that allows them to receive loan forgiveness. Unfortunately, the government doesn’t make this information widely known.

With that said, here are some steps you can take to get loan forgiveness for Parent PLUS debt.

Consolidate Parent PLUS Loans into a Direct Loan

In order to qualify for any type of loan forgiveness, you will need to consolidate your Parent PLUS Loans. You can do this by calling the U.S. Department of Education at 1-800-557-7392.

Sign up for the Income Contingent Repayment (ICR) Plan

By consolidating to a Direct Loan, you are now eligible for the ICR plan. This is the only federal repayment program option you have, but it might allow you to lower your monthly student loan payments. That will depend on your income and family size.

ICR payments are recalculated every year and are equal to 20 percent of your discretionary income. This is 20% of your Adjusted Gross Income (AGI) minus the federal poverty line for your family size. If you’re married, your spouse’s income or loan debt is added in if you file a joint tax return.

After these first two steps, you are ready to start the process of seeking loan forgiveness. You have two options available, which will depend on your place of employment.

Public Service Loan Forgiveness (PSLF)

Public Service Loan Forgiveness is available to qualifying parents who work in the public sector. You will need to work for a government or not-for-profit organization for 10 years while making 120 qualifying monthly payments under your ICR plan. If approved, any remaining debt is forgiven tax-free.

To start working toward loan forgiveness, you’ll want to fill out and submit the Employment Certification for Public Service Loan Forgiveness form. You’ll want to do this annually or anytime you change jobs. After your 120 qualifying payments, you can submit your application for PSLF.

Income-Based Repayment (IBR) loan forgiveness

If you don’t work in the public sector, there is another loan forgiveness option available. This also involves being under the ICR plan. However, this forgiveness strategy is more difficult to do, because paying 20% of your discretionary income is might pay off your loan in full before you’re eligible for loan forgiveness.

To qualify for IBR loan forgiveness, you need to make ICR payments for 25 years. After 25 years, those loans are forgiven. In order to finish 25 years of student loan payments and still have a balance to be forgiven, you need to work to lower your monthly payments.

Get lower ICR payments

Lowering your ICR payments is the key to all of this regardless of what type of forgiveness you are pursuing. The only way to lower your ICR payments is by lowering your taxable income. And how do you do that?

Maximize your retirement savings.

When you contribute to a 401(k) or pre-tax retirement program, your taxable income goes down. Since taxable income is the main factor for your monthly ICR payments, you’ll want to contribute the maximum amount.

The maximum you can contribute is $18,500 a year as an individual, but if you are married that doubles to $37,000. Now, if you are over age 50, you can contribute an additional $6,000 each with what is called the “catch-up contribution”. So if you are married and over 50, you can potentially lower your taxable income by $49,000 a year, which would lower your monthly payments significantly.

The added bonus to this plan is that you are rapidly building up your retirement savings while lowering your loan payments and pursuing loan forgiveness. Because of this, parents can also take advantage of another retirement strategy.

Since your retirement savings will be well funded, you can choose to delay Social Security benefits until age 70 and tap into your retirement funds first. By delaying Social Security to age 70, you will get a 40% higher benefit than if you claimed them at the full retirement age.

If all of this sounds unbelievable, I can assure you it’s very real. This repayment approach isn’t widely advertised by the government, and unfortunately, many parents take on Parent PLUS Loan debt without the proper guidance about their options.

IBR loan forgiveness and the “tax bomb”

While PSLF offers tax-free forgiveness, IBR loan forgiveness does not. Parents pursuing this path need to be prepared for what Student Loan Planner refers to as the “tax bomb”. After 25 years of ICR payments and the balance of your loan is forgiven, the forgiven amount will count as income on your taxes.

Dealing with a Parent PLUS tax bomb during your retirement sounds devastating. Luckily, there are a couple of rules that may take most of the sting from any tax bomb. First, the IRS is not going to foreclose on your home to settle an income tax debt. Second, there is also something in place called the “insolvency rule”. The IRS considers anyone with more debt than assets “insolvent” and does not tax forgiven debt as income in this case. This is great news for parents seeking loan forgiveness.

One strategy, if you are worried about having to pay this tax bomb is to go ahead and set aside about $1,000 a month in a Vanguard mutual fund account and letting it grow until you have the amount needed to pay the tax.

Who should pursue Parent PLUS Loan forgiveness?

If you have over $50,000 in student loan debt from Parent PLUS Loans, loan forgiveness could be a great option. It’s going to be tough dealing with paying off debt this high and still save toward retirement. By pursuing loan forgiveness, you are giving yourself the opportunity to take care of both.

Who shouldn’t pursue Parent PLUS Loan forgiveness?

If your debt is lower than $50,000, you may be better off just refinancing your Parent PLUS Loan with a private lender. You can secure a lower interest rate and just pay off the loan over time.

If your debt is even lower, say around $20,000, you won’t be able to get PSLF or loan forgiveness. You would end up paying the loan off before receiving the benefit. Again, refinancing is probably the road to take in this situation.

Another option to consider is to transfer the debt over to your child when he or she has established themselves in their career. Some private lenders allow you to do this and refinance the loans under their name.

Do more research about the strategies to find out what makes the most sense for you. The last thing you need is to be stuck with massive student loan debt during a time when saving for (and enjoying) retirement should be on your mind. It’s worth taking the time to form a plan to handle your Parent PLUS Loans as soon as possible.

Travis Hornsby founded Student Loan Planner after helping his physician wife navigate ridiculously complex student loan repayment decisions. To date, he's consulted on over $400 million in student debt personally, more than anyone else in the country. He is a Chartered Financial Analyst and brings his background as a former bond trader trading billions of dollars. He brings that same intensity to analyzing the best repayment paths for graduate degree professionals with six figures of student debt. He's helped over 1,700 clients save over $80 million dollars on their student loans, and he's been featured in U.S. News, Business Insider, Forbes, Huffington Post, Rolling Stone, ChooseFi, Bigger Pockets Money, and more.

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