paying for college liz weston
Parents who borrowed to put their kids through college now have several options to refinance their federal PLUS loans, including, in some cases, the ability to transfer their debt to those children.
The situation is a sharp turnaround from the period after the financial crisis, when private lenders fled the student loan market and few borrowers were able to refinance their debt to take advantage of lower rates.
Lending began to thaw in 2012 when a few start-ups, credit unions and banks began offering refinancing to student borrowers, said Andy Josuweit, chief executive of education loan information site Student Loan Hero.
Some of those lenders — including SoFi, CommonBond, Earnest, Citizens Bank and Darien Rowayton Bank — added PLUS refinancing in the past year. PLUS is a low-cost federal loan offered to graduate students or parents of dependent undergrads to pay for post-high school education.
That change seems to have largely flown under the radar of the 3 million parents who have borrowed an estimated $62 billion from the federal PLUS loan program, Josuweit said.
"I don't think a lot of parents know about it," he said. "But the odds of getting a refinancing are better if you're a parent than if you're a student."
That is because private lenders are looking for the long career histories, solid credit and proven earning power that parents are more likely to have than their children, said Dan Macklin, co-founder of SoFi, a market-leading San Francisco-based lender that has refinanced $4 billion in education loans since its 2011 launch.
Joe and Christiane Cruz of Washington, D.C. recently used SoFi to refinance four parent PLUS loans that were taken to fund their youngest daughter's education. SoFi lowered their fixed rate by about 2 percentage points to 5.25 percent, which saves them about $130 a month in interest.
SoFi offers variable rates as low as 1.9 percent and fixed rates starting at 3.5 percent, but most borrowers ultimately get variable rates "in the mid-threes" and fixed rates "in the high 4s or low 5s," Macklin said.
By contrast, PLUS loans issued this academic year (2015-16) carry fixed rates of 6.84 percent. Rates were 7.9 percent as recently as the 2012-13 academic year.
Like a few other lenders, including CommonBond and DRB, SoFi offers the option to transfer the balance of a parent PLUS loan via a refinance to a creditworthy child, which removes the parent from responsibility for the debt.
The Cruzes did not take that option, although they hope their daughter might take over the debt some day when her career has advanced.
The Cruzes are aware that refinancing federal PLUS loans into private debt means they gave up certain consumer protections, such as income-contingent repayment plans if their income should drop, and up to three years of deferment in case of unemployment or other financial setbacks.
"We have some cushion and some savings if anything should happen," said Joe Cruz, a client executive with information technology company Gartner Inc. "We would be able to deal with it."
Another protection the Cruzes gave up, called the Public Service Loan Forgiveness Program, is one they were unlikely to use, since neither spouse works in public service.
They expect to have the loan paid off in less than 10 years, long before they would qualify for federal forgiveness for private-sector jobs.
Forgiveness options are among the reasons that refinancing federal education loans into private debt is often a bad idea for student borrowers.
Federal student loans benefit from more-generous repayment options such as Pay As You Earn, which can lower required payments to zero for the lowest-income borrowers.
Also, student borrowers are likely to have less savings to tap in case of unemployment and may be more likely to need deferments.
Still, private refinancing options, for both parents and students, are likely to grow as more lenders head into this market.
Goldman Sachs recently noted that less than 2 percent of the $211 billion in eligible student loans have been refinanced, leaving plenty of room for growth.
"There's a lot of competition and a lot of money flowing in," Josuweit said.
Liz Weston is Reuters columnist.