loans-for-parentsCollege Loans for Parents of Students

Most parents would do anything to help their children succeed. They put the needs of their kids first from they day they’re born all the way through when it comes time for the kids to go to college. And when that time comes and a child doesn’t have enough money to pay for school, parents might be willing to ask for help on behalf of their children by signing up for parent college loans.

The name of these loans can be confusing, as they sometimes seem to imply that parents are heading to school to get their own degrees. In reality, when experts discuss college loans for parents, they’re typically discussing loans that parents take on so their children can enter a school. The parent might never set foot on a college campus, but the debt from that experience is the responsibility of the parent.

A Popular Choice

Reports suggest that a large number of parents are willing to take out loans in order to help their children.

In an article published by The New York Times, for example, the author suggests that over 2 million people 60 and older had taken out a federal student loan. The reporter is quick to point out that the federal government doesn’t differentiate personal loans from parent loans for college tuition, so it’s quite possible that this figure includes a few parents who were heading back to school on their own. The majority of these borrowers age 60 and over, however, are likely parents borrowing to help their children.

College can be remarkably expensive, and many students struggle to get the loans they need. They don’t have long credit histories or multiple assets, so they don’t qualify for a large number of traditional loans, and some parents shudder at the idea of saddling a child with a mountain of debt that can’t be repaid with ease. Rather than sending these children into part-time employment, and perhaps lengthening the amount of time they’ll need to stay in school, these parents take out student loans for their children, providing them with the boost they’ll need to make ends meet.

parent and student
Parent loans for students in college are often provided through the Federal Student Aid program. These loans, commonly known as Direct PLUS Loans, are not need-based, meaning that the parent and the child do not need to demonstrate a reduced ability to pay the costs associated with school. They must fill out a FAFSA form and will be checked for their “adverse” credit.

A black mark on a parent’s credit report makes the loan seem just a little more risky, and that parent might not be eligible for federal help as a result. In 2011, those standards became even stricter, according to U.S. News and World Report, as underwriting standards were tightened. All sorts of credit problems that were once not included in the reporting are included now, and that might make a federal loan a little harder to get. Since the new standards were enacted, the article suggests, some 400,000 people have been denied loans. Still, the federal financial aid program is designed to be the first and most accommodating source of aid for college students and their parents.

These standards are easy to criticize, but they do serve an important purpose. Federal loans come out of a pool of money the entire country shares, and when some parents default on their loans, handing out future loans becomes even more difficult. If protecting the country’s money is important, and banks are under pressure to deny risky loans, these standards might actually be good.

Tightening standards might be good for the national economy, but they can be hard on families that had a rough patch in the past and are in good shape now. Even though they know that they’ll be able to meet their financial obligations and pay back their loans on time, their credit ratings might not allow them to get the right kinds of loans. In addition, federal parent loans for college tuition are designed for a student’s parents or legal guardian(s).  Sometimes, other family members play a key role in a student’s life, and these people also want to step in and assist with the money a student needs in order to stay in school. Uncles, grandparents, aunts and even close friends all might want to take out a Direct PLUS loan like parents can,  but they might not be eligible for federal programs. Private loans can be a good option here, as these loans can allow anyone to borrow money to help a student in need. Those who have good credit now may qualify quickly, while those who don’t have excellent credit may qualify with the help of a co-signer. The application process is typically swift, and the approvals tend to come back quickly with few documents to sign. For some, this is a great option, but remember to consider and exhaust all other sources of aid before turning to private student loans.

Common Structure

Federal college loans for parents have a fixed interest rate and that rate stands at 6.31% for the 2016-17 academic year. Since the interest rate is fixed, it won’t change during the life of the loan. As long as the loan is open and active, that’s the interest rate that will apply. In addition, there is a 4.276% origination fee attached, but that will be the only additional fee a family is asked to pay.

Federal loans are provided by the government, but they’re serviced by private companies that have contracts with the government. These servicers follow rules determined by the government. They are the officials who will take payments and manage the loan.

Private loans are a little bit different, as these loans are typically dependent on the credit rating of the parent or borrower in question. Those who have excellent credit scores may have very low interest rates now, but there are also loans with variable interest rates that could change as the market changes. There are some companies, however, that provide fixed rates for college loans for parents. That rate might be a little higher than the variable rate, but it does provide the security that some people seem to desire.

loan approvedGetting a Federal Loan

Parents who want to explore their federal options must work closely with their children, and make sure those young people follow each step to the letter. For example, the students must fill out a Free Application for Federal Student Aid (FAFSA) in the early months of the year. Students need to fill out this form even if they don’t plan on taking out loans in their own names. Students also need to work with their school’s financial aid office as they fill out the FAFSA, as there is some specific paperwork that’s involved in requesting a Direct PLUS Loan.

If that loan is approved, the parents will work with the financial aid office in the school. There are documents to sign and information to read before the money can begin helping the student in question. All of these steps are vital, and none can be skipped.

Those parents who want a private college loan for their children can visit a bank of their choice to discuss their options, or check out our Student Loan Comparison Tool to see what private loan options are available, and how much they might cost over time.

Being Smart

Parents who take out college loans for their children are making a great investment in the financial future of that child, but parents also need to be smart with their money. The loans must be paid back, and parents are often in debt due to their own choices, and they might have health considerations and retirement concerns to juggle. It’s important to balance long-term financial planning for both the parent and the student: parents shouldn’t use their retirement savings, for example, to pay for these loans.

Those parents who balance the needs of an education with their own financial health are setting a good example for their children, showing them how smart people handle their money without jeopardizing their futures. It’s a tough lesson for young people to learn, but parents who show the way could be raising children who make their own smart decisions with money down the line.

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