College 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.
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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 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.
- Late payments
- Medical expenses
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.
- Based on the actual cost of the school
- Designed to cover tuition, books and general cost of attendance
- Made to accrue interest right away
- Prompt, with payments beginning as soon as the disbursements begin
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.
Getting 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.
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.
I’m the legal guardian of an undergraduate student. What type of student loan can I take out for her/him?
Legal guardians may not borrow a PLUS loan. Private loans are an option for credit-worthy individuals or majority age willing to take on the financial responsibility of the loan.
What’s a Parent PLUS loan?
Parents may be interested in the federal PLUS loan, the “Parent Loan for Undergraduate Students.” PLUS is a federally-backed loan with a low fixed interest rate that parents can take out in amounts up to the cost of attendance, less other aid received. Parents may also access a private loan (no involvement of the federal government), either as a borrower or as a co-signer with the student borrower.
Do I have to file the FAFSA before I apply for a PLUS loan?
Yes, in order to be eligible for the PLUS loan, you must file the FAFSA. Additionally, the school must determine the student’s eligibility and encourage your student to maximize the student’s annual subsidized and/or unsubsidized Direct loan amount; however, the student is not required to receive a Direct loan as a condition of receiving a PLUS loan.
What types of private loans are available for parent borrowers?
Parents may borrow through a private loan (no involvement of the federal government), either as the borrower or as a co-signer with the student borrower. Private loans in which the parent is the co-signer are referred to as “Private Student Loans.” Private loans in which the parent is the borrower are often referred to as “Sponsor Loans.”
What does it mean to co-sign on a student loan for my child?
There are many good reasons to co-sign on a student loan for your child. You will help him or her build a credit history, and help him or her qualify for a loan they wouldn’t be able to get on their own. When you agree to co-sign, you are representing to the lender that you will make the payments if your child does not. The loan’s payment history becomes part of your credit history and will show up on your credit reports.
How do I tell the difference between student loans?
There are many different kinds of student loans. First, know the difference between federal and private student loans. You should always use federal loans first. They carry lower, fixed interest rates and often have better terms than private (or alternative) loans. Second, know the difference between the types of loans in your financial aid award.
- Subsidized Direct Loans: a federal loan for which the government pays interest while you are in school
- Unsubsidized Direct Loans: a federal loan for which you pay interest while you are in school
- PLUS loans: federal loans for graduate students and parents of undergraduate students
- Private loans: loans from banks or other non-government sources
If you need to use private loans, consider all of the costs. Private loans can have origination fees, different ways of compounding interest, and higher interest rates than government or federal loans. You should also know your credit score. The lower your score, the higher your rate will likely be on a private loan. If you are an undergraduate student, you will almost definitely need a co-signer to be approved for a private loan. Fees and penalties can be higher with private loans than with government-backed, or federal loans, and your repayment terms may not be as favorable.
When choosing a student loan, investigate your options carefully. Consider the following:
- Total cost of the loan (after all of the interest and fees have accumulated)
- APR, or annual percentage rate, and fees
- Borrower benefits (such as cash back or interest rate reductions if you make payments on time)
- Deferment options