Are you a parent trying to figure out how to help your child achieve their college goals? After looking into 529 plans, scholarships, and grants, you might be considering student loans as a final option. But is taking on college debt the best decision for your family?
Paying for college is a big decision, and it’s not always easy. With rising tuition costs and tough competition for scholarships, planning for your child’s education can feel overwhelming. Taking on debt is a serious responsibility, so it’s crucial to get all the facts and make a choice that works for your family’s financial future.
What is a Parent Student Loan and How Does it Work
A parent student loan is a loan that parents can take out to help pay for their child's education. To apply for a parent student loan from the government. U.S. Department of Education, called a Direct PLUS loan (commonly referred to as a parent PLUS loan), your child must complete the Free Application for Federal Student Aid (FAFSA®), and your child must be considered a dependent undergraduate student. The FAFSA will not only help assess your financial need but will also help determine if your child is eligible for federal grants or other financial aid that doesn’t have to be repaid. After your child completes their FAFSA, you (the parent borrower) will need to complete the Direct PLUS Loan application (Direct PLUS Loan Master Promissory Note (MPN)) to borrow a Direct PLUS Loan.
You will be able to borrow up to your child’s cost of attendance (provided by the school but will include expenses like tuition, fees, living expenses, transportation, and other school related expenses) minus any other financial assistance received such as federal loans, scholarships, and grants.
Private Parent Loans are loans issued by private lenders versus the U.S. Department of Education, These loans come with different interest rates, loan terms and repayment plans than Parent PLUS loans. Interest rates (offered as either fixed or variable) may be higher or lower than the fixed rate offered by the federal government, depending on the strength of your credit score, income and other factors lenders use to determine risk.
While you may be able to get a lower rate with your excellent credit, you may be forfeiting some unique borrower and repayment benefits only available to federal borrowers so make sure to weigh all the factors before making a decision, not only if you want to borrow but also who you want to borrow from.
Reasons to Consider Taking Out a Parent Student Loan
There are several advantages to taking out a parent student loan to help pay for your child's education. Some of these advantages include:
- Easier Access to Funds for Federal Loan Borrowers: Parent Direct PLUS Loans are often easier to obtain than private student loans because they are backed by the federal government with fewer credit requirements, only look for the absence of any adverse credit item s on your credit report. This means that you may have an easier time qualifying for a Parent PLUS loan than for a private parent student loan.
- Flexibility: Parent student loans can be used to pay for a wide range of education-related expenses, including tuition, fees, room and board, textbooks, and other supplies.
- Potential Tax Benefits: Depending on your income and other factors, you may be eligible to claim the student loan interest deduction on your tax return.
- No Collateral Required: Unlike other types of loans, parent student loans don't typically require collateral, such as a home or car, to secure the loan.
The Risks of Borrowing Money for College for your Kids
Taking out a loan to help cover the cost of college may be a smart option for some families, but it is important to be aware of the responsibility that comes with borrowing money. Students and their parents should both plan to make monthly payments on-time and in full each month once repayment begins and design their finances appropriately in order to take on this responsibility. It is also important to explore all other potential financial aid resources before pursuing any loan options.
There are also some risks to consider before signing on the dotted line. Here are some of the potential drawbacks:
- Debt: Parent student loans can add a significant amount of debt to your financial obligations. This can limit your ability to save for retirement, purchase a home, or meet other financial goals.
- Cosigner: As the borrower of the parent student loan, you are legally responsible for repaying the loan. If you’re unable to make the payments, this can be problematic if you have a co-signer on the loan (due to your lack of a strong credit history), such as a spouse or other family member, as they will also be held liable for the debt.
- Risk of Default: If you are unable to make payments on the loan, it can lead to default. This can damage your credit score, making it harder to obtain credit in the future.
- Limited Repayment Options: Parent student loans have limited repayment options compared to other federal student loans. For example, they are not typically eligible for income-driven repayment plans, which can make it harder to manage payments if your financial circumstances change.
- Higher Interest Rates and Fees: Parent student loans have higher interest rates than student loans issued to undergraduate students, and while they can remove the debt responsibility from the child to you, they will ultimately cost more.
Before deciding to take out a parent student loan, it's important to carefully consider the risks involved and only borrow what you truly need (not a penny more) and what you can afford to repay. You may also want to explore other options, such as scholarships, grants, or work-study programs, to help reduce the amount of debt you take on.
How to Manage Student Debt as a Parent Responsibly
As a parent, taking on the responsibility of paying for college for your children is a heavy one. One way to manage your student debt responsibly is to make sure you understand exactly what you'll be responsible for. It's also important to understand repayment plans and income contingent options that are available when managing loan payments.
Being informed on all of these details will help make the process of paying for college go much smoother. If you've decided to take out a parent student loan to help pay for your child's education, it's important to manage that debt responsibly. Here are some tips to help you do so:
- Borrow Only What You Need: Only borrow what you need to cover your child's education expenses. It can be tempting to borrow more than necessary but remember that you will be responsible for repaying the loan with interest.
- Create a Budget: Create a budget to help you manage your monthly expenses and ensure that you can make payments on the loan. Make sure to include the loan payment in your budget and consider ways to cut back on other expenses if necessary.
- Make Payments on Time: Make sure to make payments on time to avoid late fees and negative impacts on your credit score. Consider setting up automatic payments to ensure that you don't miss a payment.
- Explore Repayment Options: Although parent student loans have limited repayment options, you may still be eligible for deferment or forbearance if you experience financial hardship. Contact your loan servicer to explore your options.
- Communicate with Your Child: It's important to communicate with your child about the loan and set expectations of the loan funds. If the funds will be used for expenses beyond tuition and fees (money owed to the school), there needs to be a clear understanding on how those funds will be used. Help your child manage their money for off-campus rent, transportation, or other costs to ensure those funds are not frivolously spent.
- Consider Refinancing: If you have multiple loans with high interest rates, you may want to consider refinancing to lower your interest rate and simplify your monthly payments. Just make sure to carefully review the terms and fees before deciding. And if you have federal student loans, understand what benefits you may be forfeiting to refinance with a private lender.
By managing your parent student Loan responsibly, you can help ensure that you and your child have a bright financial future.
Alternatives to Taking Out a Parent Student Loan
If you're concerned about the risks of taking out a parent student loan or simply want to explore other options, there are several alternatives to consider. Here are some of them:
- Scholarships and Grants: Encourage your child to apply for scholarships and grants to help reduce the amount of student loan debt they need to take on. There are many sources of scholarships and grants, including the college or university your child is attending, private organizations, and government agencies.
- Work-Study Programs: Many colleges and universities offer work-study programs that allow students to work part-time on campus to help pay for their education expenses. This can help reduce the amount of debt they need to take on.
- Federal Student Loans: Federal student loans have lower interest rates and more flexible repayment options than parent loans. It might be advantageous for your child to take out the loan and you help them repay, not only to take advantage of the better interest rates but also to help them build up their own credit.
- Payment Plans: Many colleges and universities offer payment plans that allow you to spread out the cost of tuition and other expenses over several months. This can help make the cost more manageable and reduce the need for borrowing.
- Personal Savings: If you've been saving for your child's education, consider using those funds to pay for tuition and other expenses instead of taking out a loan. This can help reduce the amount of debt your child needs to take on.
By exploring these alternatives and working with your child to find the best options, you can help reduce the burden of student loan debt and ensure a more secure financial future for your family.
