How to Unlock PSLF Double-Consolidation Benefits and Repurpose Your 529 Savings

Picture this scenario: 18 years ago — if you were lucky enough to have considered it — you started a college savings account for your child who is now graduating from high school.

The last two years have been a whirlwind of campus visits and applications. All this work resulted in a thick envelope delivered to your doorstep. Inside the envelope, your child learns they’ve been accepted, and you quickly learn how close (or not close) the school’s cost of attendance is. net worth calculator is for your situation.

As the excitement cools and you begin planning for the next chapter, the reality of the costs of higher education can become overwhelming. Explore strategic options like Parent PLUS Loans and PSLFs with 529 savings to help ease the burden.

College costs reach record high in decades

The cost of college education today has skyrocketed since the 1990s. as per the college board annual trends in college pricing The report, for the 1992–93 through 2022–23 academic years, average published tuition and fees:

• Four-year public universities increased from $4,870 to $10,940.
• Four-year private non-profit college increased from $21,860 to $39,400.

The figures above do not include room and board, allowances for books and supplies, transportation and other personal expenses. The geographic location of an educational institution can drive a large portion of these costs, but annual additional costs to consider can easily be $15,000 to $20,000 per year.

Just imagine how much it costs to maintain a one bedroom apartment in a city and cover food expenses over the course of a year.

The average inflation-adjusted cost of education has doubled in cost since your generation went to college. Add to the above numbers four years of college for one child, and you can see an average bar tab (kidding) that ranges from $100,000 to $240,000.

We should also not forget that averages are averages. The real cost of education ends up on your doorstep a few months before your child starts their first semester of college.

Is a 529 College Savings Plan Your Best Option?

So how do you prepare for this unknown, potentially huge expense?

Traditionally, you would itemize the costs in the following order:

1. Awarded scholarships and/or grants received.
2. Federal Aid in your child’s name.
3. A combination of a 529 college savings plan and your cash.

But let’s set aside the first two above, and instead, consider a valid replacement for the third solution.

Option A and Option B form an advanced plan. Typically, parents who are professors use these two options and work primarily for the university for other reasons (i.e., research opportunities, tenure, etc.). Additionally, there is a risk that their child may actually want to go to college elsewhere.

Option C isn’t necessarily a tried-and-tested route, but it’s worth considering for parents who haven’t had the opportunity to save for something they can’t expect to double the price. or they did not have the means to save. along the way.

Maximizing Your Budget With the Parent PLUS Loan

When it comes to covering the cost after scholarships, grants and federal aid are awarded in your child’s name, you may be looking at a six-figure or multiple six-figure financial commitment. If you’re struggling with how to pay for it with a loan, the Department of Education offers Parent PLUS loans to fill that gap.

Principal Plus loans are expensive loans on the surface. Like other Direct PLUS loans from the Department of Education, they come with an origination fee of about 4% and are always 1.0% higher than federal loans in your child’s name.

But the amount you borrow for your child’s education ($20,000 to $60,000 a year) is usually much higher than the amount you give to your child (between $5,500 to $7,500 a year).

When your child receives a financial aid package from their undergraduate institution, it could very easily look something like this:

Total cost of annual attendance: $65,000

• Merit-Based Scholarship: $8,000
• Grant: $0
• Direct Stafford Subsidized Loan: $2,000
• Direct Stafford Unsubsidized Loan: $3,500

so that means 1st semester total is $32,500,

• Merit-Based Scholarship: $4,000
• Grant: $0
• Direct Stafford Subsidized Loan: $1,000
• Direct Stafford Unsubsidized Loan: $1,750

Amount due on September 15 this year: $25,750

So fast forward to the end of semester eight. If you took out a Parent PLUS loan in one parent’s name for the above amount, you would have a loan debt of $206,000, plus accrued interest – perhaps a total of $250,000.

It can be alarming to look at numbers like that — especially if that amount is multiplied by the eight semesters — your child’s college savings aren’t in a 529 plan. The dues can usually be paid in installments, but after four months, another installment plan for the next semester will start.

Compound this with two kids having overlapping college years, and the situation becomes doubly difficult to keep up with!

Instead, consider this four-step strategy:

1. Borrow the Parents PLUS loan. A parent who works for, or plans to work for, a PSLF-eligible employer and/or has a low income may accept a Parent PLUS loan to pay off the balance each semester. Note: For forgiveness purposes, “sharing” parenthood plus the debt burden between the two spouses is not a good idea. Choose one of the parents and transfer the entire loan to him.
2. Work for a qualified employer. Plan to work – if you haven’t already – at an eligible employer for the PSLF program by the time your child graduates from college.
3. take advantage of double consolidation, Consolidating your Parent PLUS loans gives you access to an income-contingent repayment plan only. The double-consolidation loophole lets you access a large variety of income-driven repayment plans that can reduce your payments to as little as 10% of your discretionary income.
4. work toward public service loan forgiveness (PSLF). Follow the 120-month PSLF track on an income-driven repayment plan, and pay off your balance tax-free.

If your income as a parent household (let’s use a family size of 2) was $150,000 per year, your monthly payment on an income-driven repayment plan, such as the New Income-Based Repayment (New IBR) plan, Would be approximately $1,000 per month.

If your household income increases by 3% per year, your recalculated monthly payments will also increase every 12 months. If you continue with these payments during the new 20-year IBR period, below are the details of what you will end up paying:

Compare the income-driven repayment plan with the “pay to zero” path (same interest rate, same timeline) and it comes out ahead on paper.

If you held a W-2 job, working full-time for an eligible employer that qualifies under PSLF, you can shorten your timeline for forgiveness. After 120 months of payments made on an income-driven repayment plan – for example continuing to use the new IBR plan – this is what it might look like:

So over the course of 120 months, you’ll end up paying $133,000 in total monthly payments, leaving an estimated $291,500 balance forgiven that is not taxable at the federal level.

Note: You may owe state income tax, so it’s a good idea to save for this.

Overall, there is a very good case to be made for the cost of education with the PSLF result. Key factors include a parent borrowing the Parent PLUS loan, the same parent’s employer as a qualifying employer for PSLF purposes, and household income.

Most income-driven plans allow the parent borrower to exclude their spouse’s income if they file as “married, filing separately.” Furthermore, with the proposed Biden IDR plan, the numbers above look better for the outcome of the PSLF. It proposes a lower drop-off for the family poverty guideline that sets discretionary income percentages for graduate, versus PLUS loans.

Commonly Asked Questions from Single Parents

For single parents, the math for the forgiveness result on the IDR plan is relatively straightforward because household income is one and the same. But let’s say you are a single parent who has loans from your previous education and are looking to combine Parent PLUS loans.

It is common for many parent borrowers who have had loans from 15+ years ago, Undergraduate Stafford Subsidized Loans, and Undergraduate or Graduate Stafford Unsubsidized Loans, which have since been consolidated.

Consolidated loans, or even loans as they were, have a payment history. Some may be on IDR plan and some may be on fixed or gradual repayment plan.

When you have a repayment history on a loan and you consolidate that loan with a parent PLUS loan or a group of parent PLUS loans, the repayment history of your loans can be added to the resulting consolidated loan repayment history. But even if the parent has repayment history on the PLUS loan, that history is erased.

Historically, and (as of the writing of this), consolidation erases any and all repayment history on a loan. But this is not the case with the IDR exemption; Also, going beyond mid-2023, this may not be the case for consolidation.

With the IDR waiver, the repayment history of your education loans will be counted toward the repayment status on an IDR plan for a new consolidated loan that includes the parent PLUS loan. When the IDR exemption period expires, the proposed treatment for consolidation is that new consolidations will average the weighted repayment histories of the underlying loans (that are being consolidated).

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The timeline of months that count towards PSLF begins when your Parent PLUS loan is in repayment. If you have multiple children in college, IDR plan payments are payable as long as the youngest’s loans are anticipated to end in total repayment or forgiveness. While we think it’s worth a pre-loan counseling with a child just to find out, it goes without saying that a pre-loan counseling is worth a paid conversation with a certified student loan professional when Many children prepare to attend college.

¹Sallie Mae Revealed. Lowest APRs shown for Sallie Mae loans: Borrower or co-signer must enroll in auto debit through Sallie Mae to receive the benefit of the 0.25 percentage point interest rate reduction. This benefit is applicable only during active repayment as long as the current due amount or the nominated amount is successfully withdrawn from the authorized bank account every month. It can be suspended during forbearance or deferment.
²Ernest: All rates listed above represent an APR range. The above rate range includes an optional 0.25% auto payment discount. Serious revelations.
³Ascension Revelations. Disclosure: Ascent student loans are funded by Bank of Lake Mills, Member FDIC. Loan products may not be available in some jurisdictions. certain restrictions, limitations; Further terms and conditions may apply. For climbing terms and conditions please visit: www.AscentFunding.com/Ts&Cs, Rates are effective as of 12/01/2022 and reflect an automatic payment discount of 0.25% (for credit-based loans) or 1.00% (for graduate outcome-based loans). Automatic payment discounts are available if the borrower is enrolled in automatic payments from their personal checking account and funds are successfully withdrawn from an authorized bank account each month. For examples of Ascent rates and repayments, please visit: AscentFunding.com/Rates. 1% cash back Graduation Reward subject to terms and conditions. Cosigned credit-based loans require the student to meet certain minimum credit criteria. The minimum score required is subject to change and may depend on the credit score of your co-signer. The lowest APRs require only interest payments, the shortest loan term, and a co-signer, and are only available to our most creditworthy applicants and co-signers with the highest average credit scores.