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Navigating Parent PLUS Loans: Strategies for Repayment and Retirement Planning

Parent PLUS loans allow parents to assist their children in affording college but keep these considerations in mind.

Tips to Balance Multiple Priorities and Help Maintain Your Future Financial Security

As college students head back to campus, college financing options are an important topic of conversation for many families, and that includes Parent PLUS loans. These loans are designed to allow parents to support their children in their pursuit of higher education, and they have become a significant financial consideration for many families. As the cost of education continues to rise, parents often shoulder a substantial portion of the financial burden. In this article, we’ll explore the intricacies of Parent PLUS loans, discuss the challenges they pose, and share strategies for repayment and long-term financial planning, including retirement considerations.

Understanding the Landscape

We mentioned above that college is not getting any more affordable. In fact, costs are continuing to rise at an alarming rate. That’s one reason why Parent PLUS loans have become a common source of funding for families investing in their children’s education. Here are a few key statistics:

  • The average outstanding parent PLUS loan debt is approximately $29,324.
  • Collectively, parent PLUS debt amounts to a staggering $108.5 billion, shared among 3.7 million borrowers.
  • A significant portion of the undergraduate bill, approximately 43%, is paid by parents, with 8% of the costs funded through borrowed money.

When parents are taking on such a significant portion of college expenses – and taking on loans to do so – it’s important to consider what this means for other pressing financial priorities, namely saving for retirement. (We’ll dig further into that below.)

Parent PLUS Loan Dynamics and Interest Rates

As you consider your college funding options, it’s important to know that Parent PLUS loans come with higher interest rates compared to standard fixed undergraduate student loans. While the latter boasts a 4.99% interest rate, parent PLUS loans carry a rate of 7.54% as of this writing. That’s why it’s critical to have a repayment strategy in place if you’re relying on Parent PLUS loans to put your children through college.

Facing the Return of Payments

The U.S. Department of Education has said that the three-year student loan deferral period will end as of October 2023. This means they have mandated the resumption of payments, and this change impacts borrowers’ monthly expenses, particularly those planning for retirement.Strategies for Effective Parent PLUS Loan Repayment

If you’re facing the payments again in October, or you’ve recently taken out a new Parent PLUS loan you’ve just begun repaying, there are a few key strategies to keep in mind:

Awareness of Repayment Options: Many parent PLUS borrowers are unaware of the various repayment options available to them. One option you might consider is direct consolidation into federal direct loans, and you may also benefit from exploring the income-contingent repayment plan, which may alleviate your monthly burdens and enhance your ability to continue saving for retirement.

Income-Contingent Repayment: Enrolling in the income-contingent repayment plan may lead to debt forgiveness after 25 years of consistent payments – absolutely worth looking into if you don’t feel you’ll be able to pay off your Parent PLUS loans sooner than that.

Double Consolidation: For unique situations, investigating a double consolidation—exploiting a federal student loan system loophole—may provide access to additional income-based repayment plans.

Balancing Retirement Planning and Loan Repayment

It’s easy to see that taking on the debt and repayments of Parent PLUS loans may mean redirecting dollars you would typically save for retirement. Here’s a scenario that highlights the intricacies of balancing parent PLUS loan repayment with retirement planning:

Diane and Jack

Diane is a hypothetical 60-year-old secretary earning $60,000 annually, while her husband Jack is a successful paper salesman making $120,000 per year. Their three children have graduated, leaving them with a Parent PLUS debt of $150,000. With a monthly payment of $1,819.91, they find it challenging to prepare for retirement while managing loan repayments.

Strategies for Relief

By consolidating loans and entering an income-contingent repayment plan, Diane and Jack’s payments could be recalculated based on their discretionary income.

By filing taxes separately, Diane’s income alone could determine the payments, leading to substantial monthly savings.

These simple strategies may create significant cost savings for Diane and Jack. However, since every family’s scenario is different, it’s important to work with financial professionals, such as a financial advisor or tax advisor, to determine the best strategy for your unique needs.

Do You Need Assistance Strategizing for Your Paren PLUS Loans?

As a parent, it’s natural to want to support your children and help alleviate the financial burdens they may leave college with. However, it’s critical to remember to protect your retirement security, too. Parent PLUS loans represent a significant financial commitment for families striving to support their children’s education. As repayment strategies and retirement planning intersect, careful consideration and informed decisions are crucial. Understanding the options available and crafting a tailored approach to repayment may pave the way for a more stable financial future, allowing families to navigate the dual priorities of education and retirement with confidence.

If you’d like to discuss your personal Parent PLUS loan repayment and retirement planning strategy, we can help. At Paces Ferry, our team of experienced advisors can help you create a plan for a secure future that allows you to balance multiple priorities. Contact us today to schedule an initial conversation!

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”).  This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.

Zachary Morris

Zachary Morris, CFP®

Having traveled to over 35 countries, Zach is a believer in Ralph Waldo Emerson’s statement that Life is about the journey, not the destination. Being a CERTIFIED FINANCIAL PLANNER™ provides Zach the opportunity to help clients define and realize their journey, and co-founding Paces Ferry Wealth Advisors, an independent firm, allows the freedom to define the client experience along the way.