One of the messiest situations in student loan refinancing arises when a student is trying to consolidate and refinance their loans that were taken out by their parents to help them pay for school.
This is a common occurrence because while in school, students are only allowed to borrow a certain amount in federal loans, and many times the student’s parents can take out additional funds in the form of a Parent PLUS loan to cover the rest of the bill.
The problems arise when parents ask their student to pay back the loans that are now in their name.
Going through this refinance process can be a hassle–but it’s not impossible. Here’s how it works.
Students cannot directly take over Parent PLUS loans
According to the U.S. Department of Education, the Parent PLUS loan belongs to the parent–no matter who is making the payment each month.
This means that none of the federal consolidation or repayment programs available to the the student will apply to the portion of their debt that is technically owned by the parents.
This can seem like a major bummer–are students just stuck carrying debt in their parent’s name forever until the balance is paid off? Not quite. There are some other options.
Private lenders will sometimes allow students to refinance parent loans into their own loan
One way that students can simplify their student loan debt and consolidate parental loans with their existing student loans is to refinance through a private lender.
This process works much the same way as any loan refinance–you will essentially be taking out a new loan that is used to pay off the balances of your old loans. But, the difference is that lenders have become more flexible in terms of combining these parent loans with student loans to allow you to refinance it all into one monthly payment, and even extend the terms of repayment over 20 or 25 years in some cases.
There are ways to accomplish this, and the process for doing so is fairly simple. But, that doesn’t mean it’s always the best idea.
- Must have an undergraduate or graduate degree in a qualifying field (Law degree, medical degree, advanced nursing degree, engineering degree, etc.)
- Also offers refinance programs for parental loans
- 1.99% starting rates on variable loans
- 3.20% starting rates on fixed loans
- Consolidate private and federal loans
- 5, 10, 15, and 20 year terms available
- Fixed cap on variable-rate loans
- No origination fee or prepayment penalty
Be careful with your debt to income ratio
One thing to very carefully consider before consolidating your parents’ loans with your own is what impact it will have on your credit rating and how that will effect you over the life of that loan.
For example, if you went to an expensive college and end up consolidating all of your debt into a total sum of $100,000, but you only have an annual salary of $40,000, it will be very difficult for you to get a loan for a car or a house until you’ve paid off a significant portion of that debt.
On the other hand, if those loans remained in your parents’ name, then only the amount that you owed would appear on your credit history. You may still have a high income-to-debt ratio, but it might not be as bad as a situation where you consolidated your parental loans on top of that.