Financial Advice

What Options Do I Have to Deal With Consolidated FFEL Parent PLUS Loans?

Question:

Dear Steve,

Seven FFEL Plus Parent Consolidated into one Loan now around $85,000.

Don’t Qualify for IBR because they’re Parent Loans (thanks, Mom!).

Don’t qualify for Deferment because I’m no longer employed.

2016 AGI $1,276.00 (small pension expires in 2020).

Navient payments 257 months of $682.00 ending when I am 91 years old. 800+ credit score. No debt, tiny savings and IRA, no assets.

Only income is Social Security +/-$2,300 per month.

What could happen to my Social Security if I default on the whole deal?

Are there any avenues I may not have explored to lower these usurious payments (6.75%)

Carol

Answer:

Dear Carol,

The only issue that is confusing to me is the “thanks, Mom” comment. I’m not sure if you are thanking your mother or using that as the thanks to you from your child.

It’s only important if these are loans that your mother took out. In Parent PLUS loans the borrower, typically a parent, is 100 percent responsible for the loans, not the student.

So I’m going to proceed under the assumption these are Parent PLUS loans in your name for your child.

You are correct, the IBR is not available to consolidated Parent PLUS loans. But the Income Contingent Repayment (ICR) is.

You can use this online calculator to get an idea that your monthly payment would be in the ICR. It’s going to be the lowest available and with just best guessing on my part it looks like it would be around $135 a month. Certainly that’s better than nearly $700 a month.

If the seven loans were consolidated into a new Direct loan then you are ready to enroll that loan in the ICR. You can talk to your loan servicer for help in getting it consolidated or enrolled in the ICR program. You can also study this page for more information on the ICR.

Under the ICR you will probably never pay off the loans and the balance will grow. But the ICR will not hurt your credit score and there is no cost to opt for this income driven repayment plan.

These income driven plans are not perfect. As it stands now, after 20 years of payment on the ICR the remaining balance would be forgiven. It sounds like you will be considered insolvent so you would not face a tax liability. Additionally, if you were to unfortunately pass on, the debt would end with you so you need not be worried about anyone else having to deal with it.

At least this approach provides a remedy for the primary issue, cashflow. It will reduce your payment, continue to keep you reporting as current, and not hurt your credit score.

Oh yes, if you were to default on the whole thing, your Social Security payments could be garnished. If they were garnished you could ask for a reduction in the garnishment. See How to Easily Stop a Social Security Wage Garnishment.

My opinion is if you can qualify for an ICR payment you can afford, that’s the better way of keeping everyone quiet and happy. I’d leave the default option as a less favorable solution.

By the way, if you ever do decide to default, keep in mind that any tax refund you might be due would be intercepted as well.

Steve Rhode
Get Out of Debt GuyTwitter, G+, Facebook

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This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.

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