Low Cost Advisor

February 6, 2022

Can A Parent PLUS Loan Be Transferred To The Student? – Low Cost Advisor

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Parent PLUS loans allow parents to take out student loans on behalf of their children in college. These federal loans can be a useful funding source for parents, since they have lower credit requirements and more flexible repayment options than most private lenders.

Once the student graduates, however, some parents want to transfer those loans to their adult children—or those children want to take over the debt from their parents. But can a parent PLUS loan be transferred to the student? It’s possible, but not as easy as you might think. Here’s what to consider.

Can a Parent PLUS Loan Be Transferred to the Student?

There’s no federal program that allows you to transfer a parent PLUS loan to the student who benefitted from that loan. If you take out a federal PLUS loan, you’re responsible for it until it’s paid in full.

However, there are other options if you’re determined to transfer the debt. It’s possible to refinance a parent PLUS loan in the student’s name through a private lender. To refinance, the student can take out a new debt to pay off their parent’s existing PLUS loan. The newly refinanced debt would be in the student’s name, and the student would make payments to the private lender.

However, refinancing federal student loans comes with its own set of risks and isn’t right for everyone.

Pros and Cons of Refinancing a Parent PLUS Loan in the Student’s Name

Moving a student loan from the parent to the student has some benefits, but there are some major downsides, too. Consider the following:

Pros

  • Parents are no longer on the hook for payments. Once the loan is removed from the parent’s name, they won’t have to worry about making payments. That can free up money in their budget and potentially improve their debt-to-income (DTI) ratio.
  • The student can build a credit profile of their own. Newly graduated college students may not have much credit history, but making regular on-time payments on student loans can help build that. The more on-time payments students make, the better they’ll look to future lenders when they buy a car or apply for a credit card.
  • You might get a lower interest rate than what you’re paying now. Parent PLUS loans tend to have higher interest rates compared to other federal loans. PLUS loans disbursed between July 2021 and July 2022, for example, have a fixed rate of 6.28%. If the student is a well-qualified borrower and refinances that debt, they could likely get a lower interest rate from a private lender.

Cons

  • You’ll lose federal protections and benefits. If you refinance a parent PLUS loan, it will become private debt, which doesn’t have the same benefits as a federal loan. For example, parent PLUS loans have been automatically paused during the Covid-19 pandemic. You’ll also lose out on federal student loan forgiveness options. Refinancing is irreversible, so make sure you won’t need those benefits before taking the plunge.
  • Less flexible repayment terms. Parent PLUS loans are eligible for certain federal repayment plans, which give you up to 25 years to repay the loan. If you refinance, your terms are based on whatever standards the lender has set. Most private lenders offer repayment periods of five to 20 years.
  • Parents might still need to be on the loan. If the student doesn’t have a lot of credit history to their name, they might need a co-signer to complete the refinancing process. If they don’t qualify on their own, a parent may need to co-sign the debt—meaning they would still be responsible for loan payments if the student can’t pay.

Talk With Your Child About Your Options

If you took out a parent PLUS loan for your child and you want to find alternative ways for them to repay the debt, talk with your child about ways you can both be happy with the payment plan. You might have more choices than you think, including:

  • Keeping the current loan. If the parent is struggling to make payments or wants to share responsibility with the student, consider a more informal agreement. The student can make payments straight to the parent or add their bank account to the parent’s repayment plan. This lets you keep federal protections on the loan while still involving the student in the payments.
  • Refinancing to a new loan in the student’s name. If the student has a strong credit profile, they can take over the debt by refinancing it to a loan in their name only. The parent is removed from the responsibility, but it’s now a privately refinanced loan, not a federal one.
  • Refinancing into a co-signed loan. If the student doesn’t have much of a credit history to their name, they may not qualify for a refinanced loan on their own. In this case, the parent can add their name as a co-signer to help the student qualify. Of course, you’d also be giving up federal protections in this case, but if you can snag a low enough interest rate, the risk may be worth it.

How to Transfer Parent PLUS Loans to the Student

If you’re preparing to move your parent PLUS loan into a private refinanced loan, here’s how to do it.

Shop and Compare Lenders

Before you complete an application, read the fine print; not all lenders will refinance a parent PLUS loan into the student’s name. Lenders that do offer it include:

  • SoFi
  • Laurel Road
  • CommonBond
  • PenFed Credit Union

Also consider if the student can meet the lender’s qualification requirements. For example, most lenders will require that the student has graduated from school and can meet minimum credit and income requirements.

When you find a few lenders that fit what you need, compare them based on the offered interest rates, repayment terms and fees.

Prequalify, If Possible

If the lender offers it, see if the student can prequalify for a refinanced loan. Input some basic information about the applicant and their finances to see if they’d be eligible for a loan with a specific lender. You can see estimated interest rates and repayment terms without hurting your credit score.

If you can’t find a prequalification option, make sure your credit profile is top-notch before completing a full application.

Consider Co-Signing, If Necessary

The student might want to take over payments, but if they can’t qualify for their own loan, they’ll need a co-signer. Co-signing a loan means you’re on the hook for payments if your child fails to make them. If they miss payments, you’ll both suffer a drop in your credit scores.

If you plan to co-sign the loan, review the lender’s policies and see if there’s a co-signer release. With this option, the co-signer can be removed from the loan after certain conditions are met.

Submit an Application and Finalize the Paperwork

Once you’ve found the best lender for your situation, complete the application. Get all your documents ready, including recent tax filings, pay stubs and identification, like a driver’s license. If the loan requires a co-signer, the second applicant will also need to provide this information.

Each lender processes and manages applications differently; you might hear back right away or it could take a few days. Depending on your application, you may need to submit additional information to your lender before you’re approved.

The Bottom Line

While refinancing parent PLUS loans isn’t the best option for everyone, it makes sense in certain situations. Consider refinancing if:

  • Your child wants to build credit with a student loan in their name.
  • You can secure a lower interest rate than what you have now.
  • You don’t mind losing out on federal protections and benefits, such as flexible repayment and forgiveness options.

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