Personal finance

Should you refinance your Parent PLUS loans?

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Parents often use high-rate Parent PLUS loans to put their kids through college, but it doesn't have to be that expensive.

About 3 million parents have taken out $71 billion in federal Parent PLUS loans to pay for their children's education, according to the Department of Education. Parent PLUS loans allow parents to borrow the full out-of-pocket cost of each child's annual college education. Interest starts accruing once Parent PLUS loans are disbursed. Parents can either make payments immediately or defer them until the student graduates or drops below half-time status.

Interest rates on Parent PLUS loans are often steep compared to private loans for people with good credit. The rate on Parent PLUS loans is determined using the interest rate of the 10-year Treasury note on June 1 each year plus 4.6 percentage points. Once Parent PLUS loans are disbursed, the interest rate is fixed. Since 2006, the average rate for Parent PLUS loans has been about 7.6%. For the 2015-2016 academic year, the rate on Parent PLUS loans has dropped to 6.84%.

On top of the high rates, Parent PLUS loans come with an origination fee of 4.27%. That means if you take out a $10,000 Parent PLUS loan, you're paying a $427 fee to process the new loan.

For parents with good credit and solid employment, they can sometimes get a loan with a better rate and no origination fee through a private lender instead of the PLUS loan. Even after the Federal Reserve has raised its benchmark interest rate it makes financial sense for many Parent PLUS loan borrowers to refinance their loans with private lenders.

Private lenders offer a variety of refinancing rates and terms. For example, CommonBond offers variable rate loans ranging from 1.90% to 4.53% APR (with autopay) and fixed rate student loans ranging from 3.50% to 6.25% APR (with autopay). Rates from private lenders depend on a person's credit history, loan term and whether they sign up for automatic payments from their bank accounts.

Dropping the rate by even one percentage point through refinancing can save parents thousands, depending on the loan balance. For instance, if a couple took out a $30,000 Parent PLUS loan this year at 6.84%, they would pay $11,503 in interest costs over the standard 10-year repayment period. With a refinanced loan at 5.5%, those parents would pay only $9,067 in interest costs, saving more than $2,000 over the standard 10-year repayment period.

Refinancing with a private lender is not right for every borrower. With a private loan, borrowers are not eligible for federal income-driven repayment plans nor can they qualify for public service loan forgiveness if they refinance their Parent PLUS loans.

But if you're not going to use the benefits that come with federal loans, refinancing a Parent Plus Loan with a private loan can save you money.

A version of this article was originally published on Forbes.com.

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