It’s extremely important when consolidating federal loans that you do not add any Parent Plus loans to the consolidation of your own loans. It will taint the new loan and disallow many favorable options.
Here’s an excellent example from a current client (Cecelia) who came to see us before she did anything — just to make sure what she was doing was correct. Can’t express how valuable that decision turned out to be.
By keeping a very small Parent plus loan of $3,000 apart from all of her other loans totaling in the low six figures, this client is estimated to have an IBR payment of $191 starting in approximately 90 days. Had she not come to see us for advice first and consolidated all of her loans (as her servicer would have had her do), her loans would only be eligible for ICR and a payment of $1600.
How is this possible? The only income driven plan available for Parent Plus loans is ICR. While it’s usually better than a standard payment, it’s inferior to IBR in multiple ways. First, it requires your spouse’s income to count toward your income. That is a major problem. Second, it is calculated at 20% of your discretionary income instead of 15%. Third, it uses 100% of the poverty level of your state to determine your expenses instead of 150%. All of these things together added to a payment that was 8.5 times higher: $1600 instead of $191. Every month.
Another way of putting it, all of forgiveness that she should be allowed under Congressional approved forgiveness plans, would have been eliminated! She would have had her loans paid in full under ICR most likely. Why would a servicer who represents the creditor have helped this client get full forgiveness rather than full payment?
This is a perfect example of why all student loan borrowers need to seek a student loan lawyer who represents them to ensure they are doing the right thing. We are all for paying back debt that is owed. But we are also a strong advocate for utilizing all tools to reduce that debt to something manageable and sustainable. Which can you afford? $191 or $1600?