How to pay off Parent Plus College Loans?

How to pay off Parent Plus College Loans?
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#1

I’m 55 years old and currently have 2 kids in college. One is graduating in 3 weeks and one has another year and a half to go until graduation. As of today my Federal Parent Plus Loan debt is $67,000 and will probably be $80,000 by the time both kids graduate. The average interest of all the loans combined is right around 7%. I’ve been paying $350 a month on these loans which barely keeps the interest from compounding. When my daughter finishes in 3 weeks I will be able to add another $300 per month to the payments. When my son finishes in a year and a half I will add another $300 per month to the payments totaling $950 a month.
Both my wife and I work and bring in just over $100,000 per year combined. My credit score is 830. I’ve been putting 15% of my pay into Fidelity retirement accounts for the past 30 years and have a $890,000 retirement account as well as a $200,000 pension. My company matches up to 6% of what I contribute to my 401K.
Our home is worth about $250,000 with a $58,000 mortgage left on it currently at 5%. We have an emergency cash fund of about $25,000. We have no other debt except for minimal auto loans. My goal is to retire within 10 years debt free with 1.3M in my Fidelity Retirement Funds.

My question is how to best pay off my parent plus student loan debt?

Should I lower my contributions to my 401K to 6% thereby maintaining my 6% company match and use the 9% surplus to pay down the parent plus loans?

Should I wait to get a final parent plus total payoff after my son graduates and refinance my house to pay it off?

Any other ideas?


#2

Hi ibrew,

Welcome to the NerdWallet community! Thanks for writing in.

First of all, congratulations to your daughter on her upcoming graduation. And congrats on your impressive retirement savings! You have a lot more saved than many Americans do.

I’m going to let some other Nerds chime in on your questions about refinancing your home and reducing retirement contributions. But here are a couple of thoughts I have on the PLUS loans:

  • Can your kids help pay off your parent PLUS loans? Presumably they’ll be getting jobs and may be able to chip in. Even though you’re making great progress on your retirement savings and aren’t proposing to completely stop contributing, we typically don’t recommend sacrificing your own retirement savings for your kids’ college. (I know that’s probably easier said than done).

  • Look into parent PLUS loan refinancing. If you have good credit and a healthy debt-to-income ratio, you may qualify for a lower rate, which will save you money in interest. Another option here would be to have your kids refinance the PLUS loans in their own names, thereby getting you off the hook.

Best of luck!
Teddy

ADDITION: After my response posted I re-read your initial post and it actually seems like you’re an ideal candidate for parent plus refi:

  • You have an 830 credit score – that’s stellar!

  • I used our debt-to-income ratio calculator to estimate yours based on the info you provided, and it seems like your DTI is solidly under 36%, which puts you in a great position. You could use the calculator and likely get more accurate results.

  • You have impressive retirement savings and home equity.

Given all that, I’d definitely encourage you to look into refinancing. If you got your rate down to 5% you’d save about $10k over 10 years. At 4%, you’d save almost $15k, according to our student loan refinance calculator. Of course, it wouldn’t get rid of the debt, but it could lower your monthly payments and/or get you out of that debt faster.


#3

Thanks for the quick response teddy!
Yes in an ideal world my kids WILL be helping me payoff their Parent Plus Loans. But I’m a “worst case scenario” kind of guy. Ultimately it is my debt and I have to plan that way. Even with them helping me to pay it off I want to get it paid off as fast as I can with the least amount of interest. Even if that means me playing “banker” to my kids where I pay it off and they make payments to me after that. I will look more into parent plus loan refinancing as you suggested. Thanks Again!


#4

@ibrew, I’m with @teddy on this. Student loan refinancing is tailor made for those with great credit and ample resources, and the spread between PLUS loans at 7% and the best refi rates is substantial enough to make a real difference.

In addition, consider making extra payments even on a refinanced loan when you can (or using your kids’ contributions to do so). You can speed up your student loan payoff considerably. Here’s a calculator.


#5

Hi, @ibrew! I’ll echo @teddy’s congratulations both on getting two kids through college and having substantial retirement savings. Well done!

55 is a perfect age to consult with a fee-only financial planner about your retirement plans to make sure you’re on track. I’d definitely do that before decreasing my retirement contributions. It’s also a really good idea to get that mortgage paid off before you quit work, and not to extend the obligation with a refinance unless you don’t have other good options (which it seems you do, at least from our vantage point).

There’s a reason for our caution: the 50s are a dangerous decade for working people. A ProPublica/Urban Institute study found that more than half of the people who entered their 50s with a stable, full-time job suffered an involuntary job loss, and only one in 10 ever made as much after the loss as they did before. The median household income dropped over 40%. You may have friends or relatives who have experienced this: once they lose their job, they often have to settle for a much lower-paying one, if they find one at all.

Sorry to be Debbie Downer, but given that you’re a worst-case-scenario guy, you might appreciate knowing the odds of something going sideways. It’s really important in our 50s not to overextend or count on rising or even stable income to bail us out if we haven’t saved enough.

If I’ve done the math right, the payments you’re planning to make would get the loan paid off within 10 years. If you refinance into a lower-cost private loan, you’d lose the protections federal loans offer, such as more forbearance and deferral options than are generally available with private loans. On the other hand, private lenders aren’t allowed to take a chunk of your Social Security checks if things go wrong and you can’t repay your loans. And a lower interest rate could help you accelerate the debt payoff if times remain good or help you better afford the payments if your income drops.