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It's not uncommon for parents to want to help their child get through college, and many parents take out student loans to do that. In fact, parents of 779,000 undergraduate students borrowed an average of $16,452 in parent PLUS loans during the 2017-18 school year, according to data analyzed by the Urban Institute. Once their student graduates, however, parents may look for a way to transfer that debt to their child—especially if the payments are interfering with their ability to save for retirement and work toward other financial goals. Fortunately, it is possible for a parent to transfer that debt to their child through refinancing.
How to Transfer Parent Student Loans to Your Child
Student loan refinancing can offer a lot of benefits, one of which is the ability to transfer parent student loan debt to a child after they've graduated from college. The process is similar to the regular refinancing process, except you won't apply to refinance the debt in your name. Instead, your child will apply to refinance the debt in their name. This means your child will need to agree to take on the debt and meet the eligibility criteria set by the lender to get approved.
In some cases, though, the parent may need to cosign the application.
Pros and Cons of Transferring a Parent Student Loan to a Child
Depending on the situation, having your child refinance your parent loans in their name can have a lot of benefits. For starters, it can free up a lot of cash flow you can use for other needs.
Nearly 1 in 5 student loan borrowers contribute nothing to their 401(k) plan, according to Fidelity. While lacking retirement savings is a problem for all generations, it's more urgent for parents who have less time to catch up.
Transferring parent student loan debt to a child can make it easier for parents to prepare for retirement, pay off debt and achieve other important financial goals.
It also removes the debt from your credit reports, which reduces your debt-to-income ratio. If you're planning to apply for credit—especially a mortgage loan—reducing your debt load can give you a better chance at getting approved.
That said, if your child just graduated, they may not have the credit history or income to qualify to refinance the debt in their name. If your child doesn't meet the requirements, it might be necessary for you to cosign the application. This means the debt will still be on your credit reports, and you'll still be responsible for paying it if your child can't.
Also, if the loans are parent PLUS loans, the child won't have the same benefits that you get through the federal loan program, including access to student loan forgiveness programs, income-based repayment plans and generous deferment and forbearance plans.
What to Do if You Can't Transfer the Debt to Your Child
If your child doesn't qualify to refinance the debt in their name or they refuse to take on the responsibility, you may be stuck with the debt. Depending on the situation, though, there are some potential alternatives you can pursue:
- Seek forgiveness. If you qualify for the Public Service Loan Forgiveness or Teacher Loan Forgiveness programs, you may be able to get a portion or even all of the student loan debt forgiven.
- Ask for assistance. If your child is willing to help but can't qualify, you may ask them to make payments on your behalf or help with payments until their credit and income are in good enough shape to get approved for refinancing. Alternatively, you could check to see if your employer (or a government agency, depending on your career field) can provide loan repayment assistance.
- Get on an Income-Contingent Repayment plan. The Income-Contingent Repayment plan reduces your monthly payment to the lesser of 20% of your discretionary income or what you'd pay with a fixed payment on a 12-year repayment plan. The repayment term can be as long as 25 years, after which any remaining balance would be forgiven. If you need some relief and have parent PLUS loans, this type of plan can be a good way to get it. You'll need to consolidate your loans through the federal government to gain access to this income-driven repayment plan.
- Get on an extended or a graduated payment plan. Depending on how much you owe, you may qualify for a federal extended or graduated payment plan. These plans offer repayment terms up to 30 years, and payments that can be either fixed or graduated, which means they start out small and increase over time. You'll need to consolidate your loans to access these payment plans.
- Request forbearance. If you're experiencing financial hardship, it might make sense to apply for forbearance through your federal loan servicer or private lender, depending on the type of loans you have. Forbearance is a temporary solution, but it can give you the time you need to get your finances back on track.
- Refinance student loans in your name. If your child doesn't plan to take on the debt, refinancing the loans in your own name could help you score a lower interest rate, more payment flexibility and other benefits. Choosing this option typically means you'll lose certain protections and benefits afforded to federal student loan borrowers, so consider it carefully before proceeding.
Avoid Other Ways to Consolidate Parent Student Loan Debt
Technically, there are other ways to consolidate and pay down parent student loan debt. For example, you could use a home equity loan or line of credit (HELOC), or even a personal loan, to pay off student loans.
Home equity loans and HELOCs may be tempting because they tend to offer low interest rates. But they require you to use your home as collateral, which could result in you losing your home if you fail to repay the loan. Also, these loans can come with expensive closing costs, which could neutralize your interest savings.
Refinancing via a personal loan could also be tempting because these loans are generally unsecured. However, personal loans come with much shorter repayment terms than student refinance loans, which means higher monthly payments. They also tend to charge higher interest rates, which can put more strain on your budget.
As a result, it's best to avoid alternative consolidation options for parent student loans.
Cosigning the Refinance May Be Better Than Nothing
If your child isn't ready to refinance your parent student loan debt in their name, cosigning the application to transfer the debt in their name may be better than keeping them solely in your name. Even if you have to make payments until your child is ready, doing this will at least set the process in motion.
Once your child can begin making payments, you'll have that monthly cash flow to use for other important things. And as soon as they can qualify to take on the debt themselves, they can apply to release you from the loan as a cosigner—if the lender offers this option—or refinance the debt with another lender to remove you from the loan.
You and your child should both monitor your credit regularly to stay on top of how the debt is impacting your credit history and whether you need to take steps to maintain a good credit score. Eventually, once your child has built their credit enough, they can take over the debt. You can get a free copy of your credit report from all three consumer credit bureaus (Experian, TransUnion and Equifax) through AnnualCreditReport.com. You can also check your FICO® Score☉ based on Experian data and your Experian credit report for free.