Heads up, parent borrowers: you may have more options to lower your monthly student loan payments than you think.
Parent PLUS loans — federal loans parents can take to cover college costs for their undergraduate students — are one of the fastest growing segments of higher education debt. At the end of 2021, parents held $105 billion in PLUS loans, a 35% increase from five years earlier.
But these parent loans can be risky because they don’t come with the same borrowing limits student loans have. It’s possible to borrow up to the full cost of attendance, and parents often find the payments unaffordable, particularly as they’re approaching their final years in the labor market.
One reason why? Parents don’t have access to the same suite of affordable repayment plans available to student borrowers. That is, unless they use a little-known loophole, called double consolidation, that can help them lower their monthly payments.
We aren’t going to sugarcoat this: The double consolidation process is complicated and it’s not a fit for all parent borrowers. But for some, it can cut monthly payments by more than half. Here’s how it works.
What is double consolidation and what does it do?
Double consolidation is an unintended loophole in student loan legislation that gives parents more repayment options tied to their earnings. The rules technically state that there’s only one income-driven repayment plan available to parent borrowers, the Income-Contingent Repayment (ICR) plan, and parents can only use it after they consolidate PLUS loans into a Direct Consolidation Loan. That plan caps monthly payments at 20% of your “discretionary income“ and forgives the balance after 25 years of payments.
When you consolidate twice, however, you essentially erase the fact that the original loans were parent loans, and in doing so, you gain access to the income-driven plans for student borrowers.
Those plans, called Income-Based Repayment (IBR), Pay as You Earn (PAYE) and Revised Pay as You Earn (REPAYE), set payments based on either 10% or 15% of your discretionary income, says Meagan Landress, a certified student loan professional with Student Loan Planner. The plans also define discretionary income in a way that shields more of your earnings from the payment calculation. In other words, your monthly bills drop to 10% or 15% of your income and that percentage is based on a smaller portion of your take-home pay. Like with income-contingent repayment, the government forgives any balance remaining after a maximum of 25 years.
Double consolidation isn’t outlined on the federal website, nor will your loan servicer suggest it. In fact, they might not know about it. It’s not illegal, though.
“There’s nothing you can get in trouble for,” Landress says, “but the one downside is Congress is aware this loophole exists. They could close access to the loophole by changing the legislation.”
Double consolidation benefits you by cutting your monthly payment significantly, says Fred Amrein, CEO of PayforEd, a student loan assistance company. For example, on the parent income-contingent repayment plan, if you had an adjusted gross income of $60,000, you’d owe $773.50 a month. But with the same income on a more generous repayment plan that calculates payments based on 10% of discretionary income, your monthly bill would fall to about $330.
Who benefits most from the strategy
Double consolidation is a complex and time-consuming process, and it isn’t suitable for many borrowers. Any time you consolidate, for example, it restarts the clock on your payment credits. That means if you've already been making payments for several years and working toward forgiveness after 25 years on the income-contingent plan, double consolidation might lower your monthly payments, but it would mean you'd have to pay for many more years, since you'd be starting over on your timeline to forgiveness.
However, if you’re carrying a loan balance greater than your income, it may provide significant relief, says Erik Kroll, a financial planner who frequently works with clients who are over 50 and paying down student debt.
Depending on your age, 25 years could mean you’re making loan payments deep into retirement, but if you have substantial debt, that may be the only manageable path. Keep in mind that federal loans are discharged if you end up disabled or you die before they’re paid off. It’s a depressing thought, but at least no one inherits the debt. (However, just because the debt is discharged when you die doesn’t mean you can stop paying in retirement. If you fall behind and default on your loans, the government can garnish your Social Security payments and seize tax refunds).
Alongside double consolidation, financial advisors also suggest contributing as much as you can into qualified retirement accounts to reduce taxable income. That kills two birds: you’ll have a lower loan payment based on the reduced taxable income and you’ll increase your retirement savings.
Loan payments may drop even lower once you’re fully retired if you're living off a lower taxable retirement income.
“You have a little control over how much you take from your retirement accounts, which dictates your income, which dictates your payment,” Kroll says.
The nitty gritty on the steps involved in double consolidation
The strategy is called double consolidation, but you’re actually consolidating three times with three different servicers (two of them simultaneously). That’s why it takes time. According to the federal government, consolidation takes 30-90 days, though Landress has seen 30-45 days.
Typically, you won’t start the process until after you’ve finished borrowing for your student — that could be four or more years after the first loan — and it’s generally best to leave your own education loans out of the process because you don’t want to restart the clock on those loans if they’re already in one of the income-driven plans.
Landress has written a very detailed article on double consolidation, but here’s an overview.
You’ll need at least two individual PLUS loans, though most people who borrow take out a new loan for each year they borrow, so this shouldn’t be an issue. As a first step, you’ll submit two paper applications to two loan servicers different from your existing servicers. You’ll request to consolidate a portion of your PLUS loans into a Direct Consolidation Loan with each one. You can consolidate any combination, even one loan with one servicer and three with another. Think of it as “converting” your loans, rather than just consolidating multiple loans into a single one, Landress says. Each servicer consolidates the loans submitted. They won’t know you’re also consolidating with another servicer. The paper applications ensure the loans aren’t combined into one Direct Consolidation loan, as would happen if you applied online. At the end, you have two Direct Consolidation loans. This process could take up to 90 days.
Now it’s time to apply online to a third servicer to combine the two consolidation loans. It’s this third servicer process that opens up access to the other income-driven plans, because the Parent PLUS tag is now long gone. The entire process from beginning to end could take at least 6 months.
Why you might need a financial professional
Even after all that work, you still may have some complicated questions to sort through, including which income-driven plan makes the most financial sense for your circumstances. For example, Pay as You Earn (PAYE) and Revised Pay as You Earn (REPAYE) are the most affordable, basing your payment on 10% of your income, but REPAYE counts spousal income in the payment calculation, while PAYE has stricter eligibility parameters. Married people may benefit more from the Pay as Your Earn and Income-Based Repayment plans, because these plans calculate payment off a single income. But that also means filing taxes as married, filing separately to qualify. Experts typically recommend changing your tax filing status the year before in preparation for consolidating.
Finding the right advice isn’t always easy.
“Loan servicers and financial aid officers cannot provide any tax or personal finance advice, and tax professionals don’t understand student loan payment,” Amrein says.
That’s why a financial advisor with a Certified Student Loan Planner designation and a tax background may be worth consulting. Check the Certified Student Loan Advisors Institute for someone in your area. This person can also help you assess whether jumping through the hoops to complete a double consolidation is worth the work for your personal circumstances.
“You’ll have to understand the numbers,” Amrein says.