Parents who took out federal loans to fund their children’s college education can potentially reduce their monthly repayments using a loophole, according to student loan experts.
President Joe Biden’s relief plans for over 40 million Americans with federal loans excluded Parent PLUS Loans from the most beneficial income-driven repayment (IDR) plans. With 3.8 million Parent PLUS borrowers, disproportionately Black and Latino, they’re limited to the higher monthly payments of the Income-Contingent Repayment (ICR) plan.
However, parents can access more cost-effective IDR plans through a loophole, but time is of the essence. The Department of Education intends to close this loophole by July 1, 2025, so eligible parents must act quickly to take advantage of this opportunity.
What is the ICR plan?
The Income-Contingent Repayment (ICR) plan is consistently available for Parent PLUS Loan holders, offering repayment based on income and family size. Payments are calculated as the lesser of either 20% of discretionary income or fixed payments over 12 years, adjusted according to income. However, it’s important to note that payments under the ICR plan can sometimes exceed those required under the 10-year Standard Repayment Plan, as cautioned by the Department of Education.
The repayment length for the ICR plan is 25 years, and to be eligible, Parent PLUS loans must be consolidated into a direct loan.
How ICR compares with other repayment plans?
Other repayment plans typically offer lower monthly payments compared to the Income-Contingent Repayment (ICR) plan since they are based on a smaller percentage of your income and often feature lower interest rates. These plans cap payments at between 10% and 20% of discretionary income. For instance, under the new SAVE plan, which offers enhanced protections, payments are capped at 5% for undergraduate loans starting in July.
Consider this scenario: If you earn $50,000 annually and have $100,000 in Parent PLUS loans, the monthly payment under the ICR plan would be $590, whereas under the SAVE plan, it would only be $143, according to Student Loan Planner.
Additionally, some plans offer shorter repayment periods, with remaining balances forgiven after 20 or 25 years of payments. Eligible individuals can also have their remaining debt forgiven after just 10 years if they qualify for Public Service Loan Forgiveness (PSLF) while enrolled in an income-driven plan.
Furthermore, the new SAVE plan includes an interest benefit: If you make your monthly payment, your loan balance won’t grow due to unpaid interest accrued since your last payment.
How can Parent PLUS Loan holders get a better repayment plan?
Accessing the most advantageous SAVE plan entails a time-consuming and complex process, requiring a meticulous double consolidation of loans by July 1, 2025.
Firstly, parents must possess more than one PLUS loan to benefit from this plan. Stacy MacPhetres, Senior Director of Education Finance at EdAssist by Bright Horizons, advises initiating the consolidation process on paper for existing Parent PLUS loans. This involves consolidating loans with two different servicers and selecting the Income-Contingent Repayment (ICR) plan. Since only one online consolidation is permitted, this step must be done via mail, with approval potentially taking up to 90 days.
Once confirmation of the initial consolidation is received, parents must proceed with a second consolidation. This involves consolidating the loans together online with a new servicer, obscuring the fact that the original loans were Parent PLUS loans. Subsequently, they can enroll in an income-driven repayment (IDR) plan with lower payments.
To maximize benefits, completing the process by April 30 ensures payment counts for consolidated loans start from the very first payment, potentially accelerating progress toward forgiveness. While achieving this deadline may be challenging for those just beginning the consolidation process, partial credit can still be obtained through a weighted average calculation.
For instance, if one loan has been in repayment for three years and another for four, the combined credit would amount to 3.5 years towards forgiveness.