This loophole could cut Parent PLUS loan payments in half

Attention, borrowing parents: you may have more options than you think to reduce your monthly student loan payments.

Parent PLUS Loans — federal loans that parents can take out to cover the tuition fees of their undergraduate students – are one of the fastest growing segments of higher education debt. At the end of 2021, parents held $105 billion in PLUS loans, a 35% increase from five years earlier.

But these parent loans can be risky because they don’t come with the same borrowing limits as student loans. It is possible to borrow up to the full cost of tuition, and parents often find the payments unaffordable, especially as they approach their final years in the workforce.

A reason why? Parents do not have access to the same set of affordable repayment plans as student borrowers. That is, unless they use a little-known loophole called double consolidation, which can help them lower their monthly payments.

We’re not going to sugarcoat this: the double consolidation process is complicated and not suitable for all borrowing parents. But for some, it can cut monthly payments by more than half. Here’s how it works.

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What is double consolidation and what is it used for?

Double consolidation is an unintended loophole in student loan law that gives parents more repayment options tied to their income. The rules technically state that there is only one income-based repayment plan available to parent borrowers, the Income Contingent Repayment (ICR) plan, and parents can only use it after consolidating PLUS loans into a direct consolidation loan. This plan caps monthly payments at 20% of your “discretionary incomeand forgives the balance after 25 years of payments.

However, when you double-consolidate, you essentially erase the fact that the original loans were parental loans, and in doing so, you gain access to the income-driven plans for student borrowers.

These plans, called income-based reimbursement (IBR), Pay as You Earn (PAYE) and Revised Pay as You Earn (REPAYE), set payments based on 10% or 15% of your discretionary income, says Meagan Landress, a certified student loan professional with Student Loan Planner. The plans also define discretionary income in a way that shields more of your income from the payout calculation. In other words, your monthly bills drop to 10% or 15% of your income and this percentage is based on a smaller portion of your net salary. As with the income-contingent refund, the government forgives any remaining balance after a maximum of 25 years.

Double consolidation is not described on the federal website, and your loan officer won’t suggest it either. In fact, they might not know. It’s not illegal, however.

“There’s nothing you can get in trouble for,” Landress says, “but the only downside is that Congress is aware that this loophole exists. They could close access to the loophole by changing the legislation.

Double consolidation benefits you by significantly reducing your monthly payment, says Fred Amrein, CEO of PayforEd, a student loan assistance company. For example, under the parental income-contingent repayment plan, if you had an adjusted gross income of $60,000, you owed $773.50 per month. But with the same income on a more generous repayment plan that calculates payments based on 10% of discretionary income, your monthly bill would drop to around $330.

Who benefits the most from the strategy

Double consolidation is a complex process that takes time and is not suitable for many borrowers. Every time you consolidate, for example, it restarts the clock on your payment credits. This means that if you’ve already been making payments for several years and are trying to get a discount after 25 years on the income-contingent plan, double-consolidating might lower your monthly payments, but it would mean you’ll have to pay for many more years, since you would start over on your timeline for forgiveness.

However, if you have a loan balance greater than your income, it can provide significant relief, says Erik Kroll, a financial planner who frequently works with clients over 50 and pays off student debt.

Depending on your age, 25 might mean you pay off your loan until you’re out of retirement, but if you have significant debt, that might be the only manageable path. Keep in mind that federal loans are dump if you become disabled or die before they are paid. It’s a depressing thought, but at least no one inherits the debt. (However, just because the debt is paid off when you die doesn’t mean you can stop paying in retirement. If you fall behind and fail to repay your loans, the government can garnish your debt payments. social security and seize tax refunds).

Along with double consolidation, financial advisors also suggest contributing as much as possible to qualified retirement accounts to reduce taxable income. This kills two birds: you will have a lower loan repayment based on the reduced taxable income and you will increase your retirement savings.

Loan repayments can drop even further once you’re fully retired if you’re living on lower taxable retirement income.

“You have a bit of control over how much you take out of your retirement accounts, which dictates your income, which dictates your payout,” Kroll says.

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The basics of the stages of double consolidation

The strategy is called double consolidation, but you are actually consolidating three times with three different services (two of them simultaneously). That’s why it takes time. According to the federal government, consolidation takes 30 to 90 days, although Landress has seen 30 to 45 days.

Typically, you won’t start the process until you’ve finished borrowing for your student — it can take four years or more after the first loan — and it’s usually best to leave your own student loans out of the process. because you don’t. I don’t want to restart the clock on these loans if they are already in one of the income driven plans.

Landress wrote a very detailed article about double binding, but here’s an overview.

First consolidation

You will need at least two individual PLUS loans, although most people who borrow take out a new loan for each year they borrow, so this shouldn’t be a problem. Initially, you will submit two paper applications to two loans repairers different from your existing repairers. You will ask to consolidate a part of your PLUS loans into a direct consolidation loan with each of them. You can consolidate any combination, even one loan with one manager and three with another. Think of it as a “conversion” of your loans, rather than just consolidating multiple loans into one, Landress says. Each manager consolidates submitted loans. They won’t know that you are also consolidating with another repairer. Paper applications ensure that loans are not combined into one direct consolidation loan, as would occur if you applied online. At the end, you have two direct consolidation loans. This process can take up to 90 days.

Second consolidation

Now is the time to apply online to a third servicer to combine the two consolidation loans. It is this third service process that unlocks access to the other income-focused plans, as the Parent PLUS tag is now long gone. The whole process from start to finish could take at least 6 months.

Why You Might Need a Finance Professional

Even after all that work, you may still have some complicated questions to resolve, including which income-focused plan makes the most financial sense for your situation. For example, Pay as You Earn (PAYE) and Revised Pay as You Earn (REPAYE) are the most affordable, basing your payment on 10% of your income, but REPAYE takes spousal income into account in calculating the payment, while that PAYE has stricter eligibility parameters. . Married people may benefit more from the Pay as Your Earn and Income-Based Repayment plans because these plans calculate payment on a single income. But it also means filing taxes as married, filing separately to qualify. Experts generally recommend changing your prior year tax filing status in preparation for consolidation.

Finding the right advice is not always easy.

“Loan servicers and financial aid officers cannot provide personal tax or financial advice, and tax professionals don’t understand student loan repayment,” Amrein says.

That’s why a financial advisor with a Certified Student Loan Planner designation and tax history may be worth consulting. Check the Institute of Certified Student Loan Counselors for someone in your area. This person can also help you assess whether jumping through the hoops to complete a double consolidation is worth it given your personal circumstances.

“You will have to understand the numbers,” says Amrein.

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