Dear Quentin,
My husband took out $100,000 in Parent PLUS loans for his daughter to attend college, with the understanding that she would repay them. She dropped out after two years, citing mental-health issues. Since then, she has had a part-time job, but she was recently fired. There is little to no chance that she will ever be able to repay these loans. Should we consider refinancing them with a private lender to secure a better interest rate?
The Stepmom
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.
Dear Stepmom,
Tread carefully – very carefully.
I hope your stepdaughter gets the support she needs and I hope your husband pays off this loan — in that order. Think twice before refinancing this $100,000 loan; it will be hard to find another with the same benefits. Prime among those perks is a fixed interest rate; the interest rate on a private student loan can range from 2.99% to about 17.99%, based on your credit rating.
“Your private parent loan APR may actually end up being lower than a Federal Parent PLUS loan, if you have excellent credit. But, be careful when comparing the fixed interest rate on a federal loan with the variable interest rate on a private loan,” according to SavingforCollege.com. “The variable interest rate has nowhere to go but up, and may ultimately cost much more than the fixed rate on the Federal Parent PLUS loan.”
Once a transfer to a private lender has been made, it can’t be undone.
The credit underwriting required for federal Parent PLUS loans is not as strict as for other student loans, so Parent PLUS loans are generally easier to get approved. Borrowers are eligible for three repayment plans: standard, graduated and extended. Parent PLUS borrowers can also access a payment plan that allows them to repay their loan as a percentage of their income, but they have to act fast as that option will disappear if they don’t consolidate their loans by July of this year. The most recent rate for these loans is close to 9%. I don’t know whether your husband got a reasonable interest rate, but in any case it’s not cheap money.
Interest began to accrue this loan as soon as it was sent to your stepdaughter’s school, and it will continue to grow whether she’s in school, has deferred or dropped out. There’s also a 4.228% origination fee for these loans, which is deducted proportionately from each loan disbursement. For example, a loan of $10,000 will have $422.80 deducted, resulting in a net disbursement of $9,577.20.
Losing federal benefits
In refinancing, your husband would lose a raft of federal protections and flexible deferment and forbearance options. Federal Parent PLUS loans also offer disability discharge if either the borrower or student becomes totally and permanently disabled. And once the transfer to a private lender has been made, it can’t be undone.
As Sallie Mae points out, federal student loans are backed by the government, whereas private student loans are offered by banks, credit unions and other financial institutions — and the interest rate is determined by the amount of the loan and credit rating of the borrower. “The parent is the borrower and is responsible for paying back the loan,” the student-loan lender says. “The loans are unsubsidized.”
Federal parent loans will soon be capped at $20,000 a year, with a lifetime maximum of $65,000 per student.
Starting on July 1, 2026, federal parent loans will be capped at $20,000 a year, with a lifetime maximum of $65,000 per student. These changes replace the current policy allowing parents to borrow up to the full cost of their child’s college attendance. (Parents who took out a PLUS loan before July 1, 2026, may continue borrowing under the existing rules for up to three academic years, or until the student completes their program.)
Your husband could consider consolidating the federal Parent PLUS loan into a direct consolidation loan, which could make him eligible for income-contingent repayments, although this could extend the payment period. Negotiating some level of contribution from your stepdaughter may be beneficial both financially and psychologically, and affirm to her that she does not live a consequence-free life.
Now the hard work begins.
More columns from Quentin Fottrell:
Can I stop my kids from using their inheritance to support political causes I vehemently oppose?
‘He is retired’: Should my husband take his Social Security at 62 and invest it?
My wife’s credit-card payment is three months overdue. As an authorized user, am I in trouble?
Check out The Moneyist’s private Facebook group, where members help answer life’s thorniest money issues. Post your questions, or weigh in on the latest Moneyist columns.
By emailing your questions to The Moneyist or posting your dilemmas on The Moneyist Facebook group, you agree to have them published anonymously on MarketWatch.
By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
