The Ultimate Guide to Parent Student Loans
The cost of attending college continues to increase each year, making it more of a burden to both individuals and families. Many parents want their children to get the college experience, not to mention a degree, as it comes with tangible and intangible benefits they get to enjoy for the duration of their adult lives. Parent student loans can be one way to make college more of a reality for children, but there are many things to consider when a parent is considering taking out a student loan for their child’s education.
The average 2016 college graduate has over $37,000 in student loan debt. As a result, graduates often start their careers at a disadvantage thanks to student loan payments that impact their ability to work towards other financial goals. A parent student loan is one way to mitigate that risk and make college more affordable for the student to attend.
If you’re considering taking out a parent student loan, keep the following in mind to ensure a balance between the college experience for your child and your own financial needs.
What is A Parent Loan?
A parent loan is as simple as it sounds. You as the parent take out a loan to fund college expenses for your child. The loan is in your name and not the name of your child, in some cases, with the funds being directly disbursed to the college your child attends.
You may do this for a number of reasons, from your child having unmet needs after receiving their financial aid award to you wanting to take on the indebtedness yourself.
With the average in-state four-year university costing over $24,000, it’s understandable that you as the parent may be in the position where you feel the need to help. There are two main loan types if you’re considering taking out a parent student loan to pay for college expenses, those are:
- Parent PLUS Loans
- Private Student Loans for parents
Parent PLUS Loans are the more well-known of the parent student loans, with private student loans for parents offering more flexibility.
Parent PLUS Loans vs. Private Student Loans for Parents
Parent PLUS Loans and Private student loans for parents share one key quality – they allow you as the parent to take out loans to help fund your child’s college expenses. The similarities begin and end there.
Below are some of the important things to keep in mind with each loan option, including drawbacks, eligibility, and how to apply for each loan.
Parent PLUS Loans
Direct PLUS Loans – Parent PLUS Loans are officially known as Direct PLUS Loans. The federal government gives the Direct PLUS Loan to parents of undergraduate students whose financial aid falls short of their needs. They must be your biological child, but in some cases, an adoptive or step child will also qualify you for a loan. Your child must also be enrolled on at least a part-time status.
The parent is responsible – With traditional student loans, the student is typically responsible for repaying the indebtedness. That is not the case with parent PLUS Loans. The loan is in the name of the parent and they must repay the indebtedness. It is possible to transfer the loan payments to the child if they roll them into refinancing other student loans.
Must have a good credit history – A credit check will be done when you apply for a PLUS Loan, so it’s important not to have an adverse credit history.
Your child must fill out a FAFSA – Your child must fill out a FAFSA in order for you to apply for a PLUS Loan.
Fixed rate only – Whereas private parent loans offer variable rates, PLUS Loans offer only fixed rates and, historically, have higher rates than other loan options.
Disbursements go directly to the school – The school receives the disbursement. If there are remaining funds after paying for responsibilities, your child will receive the balance.
Payments are due right away – Loan repayments are due once funds are disbursed to the school, though, deferments are possible. It is important to note that interest will accrue when payments are in deferment status.
Loans can be discharged – In certain circumstances, your PLUS Loan may qualify to be discharged or forgiven.
Private Student Loans for Parents
You apply through a bank – You can get a private parent loan through many banks or other financial institutions. Unlike PLUS Loans, you do not go through the government to receive funds. You don’t have to be a parent to take out the loan; it can be any family member that wishes to help with college expenses.
Rates are typically better than PLUS Loans – Fixed interest rates on private loans tend to be better than on PLUS Loans, depending on your credit score. Private loans also offer a variable rate option.
You may need a cosigner – Depending on your creditworthiness, a cosigner may be needed to take out a private loan.
You may lose interest deductibility – Federal loans typically offer the ability to deduct interest, whereas private loans often do not offer that perk.
Little forgiveness – private parent loans do not usually offer income-based repayment schedules or forbearance.
Prepayment penalty – You may face a prepayment penalty with some private parent loans; that is not the case with PLUS Loans.
Is a Private Parent Loan the Right Move for You?
Financing an education is obviously an important decision for families. You want to balance not burdening your child with an overwhelming indebtedness, but you also don’t want to sacrifice your own current and future needs.
With that in mind, there may be some situations where a private parent loan may be a good fit. Those are:
- You don’t want the loan solely in your name. Private parent loans offer the ability to add a cosigner. PLUS Loans do not offer that feature. While they can be combined with other student loans in a refinance, you as the parent are solely responsible for the indebtedness.
- You want a better interest rate. Rates on PLUS Loans are typically higher and fixed. Private parent loans allow you to take advantage of variable rates, possibly saving you money in the long run.
- You want more flexible terms. Private parent loans are available to families with students who are less than part-time, unlike federal loans. Private loans may also allow for longer repayment terms. This gives private parent loans more flexibility.
Private parent loans are not a good fit for everyone. If you want to help your child with financing college, but private parent loans aren’t a good fit, there are other options, such as:
There may be other options, though, these are the most common ones many will consider. Before you pick a solution, make sure you consider the associated risks. It’s great to help your child, but you also do not want to sacrifice the long-term health of your finances along the way.
Shopping Around for Parent Student Loans
Shopping for parent student loans takes a lot of work. You want to make sure you find the best possible rates, while at the same time finding a reputable lender that will work with you. Here are some things to keep in mind when shopping for parent student loans:
Fees – Be sure to compare whether or not the lender charges an origination fee on the loan.
Who is repaying the loan – This is particularly important if your child cosigned on the loan. Make sure both parties are clear who will be making payments.
Forbearance – Many private lenders don’t offer forbearance or income-based repayments. If you feel it may be a need in the future, make sure the lender offers forbearance options. Private parent loans can rarely be discharged, so this is an important consideration to keep in mind.
Rates – If you opt for a variable rate, make sure you know when rates will reset and how wide the range can be.
Your child’s major – Let’s face it, not all degrees hold the same earning ability. Helping your child through college is a noble thing to do, but you don’t want to go into significant debt to fund a degree that likely won’t allow them to earn a good income.
It’s important to know what to look for when shopping around for parent student loans. However, what’s just as important is your own financial situation. How close are you to retirement? What debt do you currently have that you need to pay off? What kind of retirement do you plan on living?
These are all important questions to ask yourself before taking the plunge on parent student loans. Helping your child is a great thing to do, but you also don’t want to end up being a burden to them in the future because you took on too much debt for their college expenses.
Parent student loans can be a great way to help your child through college. With a little due diligence, you can find an option that helps your child without impacting your future too much.