Is a Parent Student Loan Right for You?
As a parent, you want to support your child’s educational dreams and help build a strong financial future for them, but should taking out a loan really be part of that plan? Trying to understand the intricacies of student loans—particularly parent student loans—can be confusing. Before you sign on the dotted line, it's important to know what options are available to you and you’ll want to understand all the pros and cons associated.
Parent Student Loan Options
Parent student loans are designed specifically for parents who want to contribute to their children's college expenses. There are two main types of parent student loans available: federal parent Direct PLUS Loans and private parent student loans. Each loan type has its own benefits and drawbacks, so it’s important to understand the differences between them before making a decision.
Federal Parent Direct PLUS Loan
The Federal Parent PLUS Loan is a federal loan program that allows parents of dependent undergraduate students to borrow money to attend an eligible college or career school. This loan has a fixed interest rate based on a formula set by Congress which resets every year and are also assessed an origination fee.
The maximum amount that can be borrowed each year is equal to the cost of attendance minus any other financial aid received by the student, such as grants or scholarships. To qualify for this loan, the U.S. Department of Education will run a credit check, however it’s not the same type of credit check as private student loans. The credit check is only checking to see if the borrower has adverse credit history. If a parent is denied a Direct PLUS Loan, they have a few options.
- Submit a successful appeal to explain adverse credit history, or
- Apply with an endorser who does not have adverse credit and must complete PLUS credit counseling.
If a parent is determined ineligible to borrow a Direct PLUS Loan, for whatever reason (i.e., not meeting eligibility requirements, or unable to pass a credit check), the dependent undergraduate student will be eligible for Direct Stafford Loan limits of an independent undergraduate student. That means, they will have access to additional federal student loan funds to help them pay for college. To qualify for higher loan limits each year, the parent will need to be denied a Direct PLUS Loan each year.
Private Student Loans
Private student loans are another option for parents who need additional funds for college expenses. These loans offer either variable or fixed interest rates, and typically they will not have origination fees.
Private lenders will tend to have more stringent eligibility requirements than those required for federal student loans, making them sometimes harder to obtain. Parents typically need to have strong credit, a good debt-to-income ratio, and at least two years of work history to qualify without a cosigner. Otherwise, a cosigner (someone else who meets the credit requirements and who is willing to be responsible for the loan if the borrower can’t make payments) will be needed to obtain a loan.
When considering private student loans, it’s important to compare offers from multiple lenders and read all terms and conditions carefully before signing any documents. Generally, at the time you choose your loan, you will also be choosing your repayment plan. Private student loan lenders may offer options like immediate repayment after disbursement, or after your child graduates or drops below half-time enrollment with their school. Be sure you understand what your repayment obligations will be before taking out a loan.
Parent Student Loan Tips
- No matter which type of parent student loan you choose, there are several tips that can help make the process easier:
- Start researching early – Start researching once you child makes a school list. Determine which lenders work with which schools and start researching their offerings.
- Compare multiple lenders – Take time to compare offers from different lenders in order to find the best deal possible
- Consider all costs – Make sure you understand all fees associated with each loan type before signing any documents
- Read all terms & conditions – Be sure you understand all terms and conditions associated with each loan type before signing any documents
- Check eligibility requirements – Make sure you meet all eligibility requirements before applying for any type of loan. If you’re unsure you will qualify, many lenders offer a soft credit check that will not affect your credit.
- Seek advice if needed – If you have questions about any aspect of parent student loans, don’t hesitate to seek advice from the lender, an expert or financial advisor.
Pros of Parent Student Loans
If you're a parent trying to help your child pay for college, a parent student loan can be a good option to consider. Here are some reasons why:
- Parent student loans may be a tool to help cover financial aid gaps your child has. If your child’s financial aid wasn’t enough to cover all the costs of tuition, fees, and other expenses associated with college, this is an option that may help.
- The interest rate on a Parent PLUS Loan is fixed, which means it’s not based on your credit. As long you qualify, you will be given the rate offered that academic year.
- Student loans are considered a type of unsecured debt, so you won't need to put up your house or car as collateral for a parent student loan.
- Parent loans can borrow up to the full cost of attendance, including room and board, textbooks, and other expenses, minus all other financial aid received by the student.
- Parents with more financial means, taking out student loans instead of their children, will help the child avoid taking on debt to pay for college and afford them the prospect of graduating debt free.
Cons of Parent Student Loans
If you are considering borrowing parent student loan, there are several cons to be aware of:
- You will be responsible for repaying the loan: Unlike other forms of student financial aid, parent student loans are solely in the name of the parent, which means you are responsible for repayment. This can add a significant financial burden to your budget.
- High interest rates: Federal parent Direct PLUS Loans typically have higher interest rates than federal student loans intended for student borrowers. That means a Direct PLUS loan is typically a more expensive federal student loan to borrow.
- Limited repayment options: Parent student loans generally have fewer repayment options than federal student loans. For example, you can’t pay a Direct PLUS Loan borrowed by a parent with an income-drive repayment plan unless you are willing to consolidate the loan with a Direct Consolidation loan.
- Impact on credit: Taking out a parent student loan will increase your debt-to-income ratio, and any mistakes can lead to negative reporting to the credit bureaus. If you miss payments or default on the loan, it can damage your credit report and make it harder to qualify for future loans or credit.
- Potential for long-term debt: Parent student loans can result in significant long-term debt. If you have multiple children who are attending college, it can be challenging to keep up with the loan payments, especially if you have other financial obligations.
Parent student loans can be a helpful way for families to finance a child's education, but they come with several significant drawbacks that must be carefully considered. Families should weigh the pros and cons carefully and consider their ability to make loan payments over the long term before making a commitment.
Responsibility of Repayment
One of the most significant considerations when taking out a parent student loan is the responsibility for repayment, especially if there are other children who will need college money as the years go by. Unlike most federal student loans, which are typically taken out in the student's name and become their responsibility to repay, parent student loans are taken out in the parent's name and are their sole responsibility to repay.
This means that you must carefully consider your ability to repay the loan before taking it out. Weigh the cost of the loan against your current financial obligations, such as mortgage payments, credit card debt, and other expenses. Consider the long-term impact of taking on a significant amount of debt, even more so, if you are nearing retirement age.
Know when the first payment is due, how much the payment will be, and what the repayment term is. It's also important to understand the consequences of late or missed payments, as this can result in late fees, penalties, and even damage to your credit report.
As a parent, you want to do everything you can to help your child succeed. One of the most important investments you can make is in their education. But with college costs rising, it can be difficult to cover the full expense without some help. That’s where parent student loans come in but make sure you consider this option thoughtfully before taking on additional debt.