Deciding how to assist your child to pay for college is one of the biggest financial decision’s parents face in their lifetime. Not only is education expensive, but unless your child has special qualifiers, chances are they will need additional loans and support to meet their goals. The average university in America costs between $38,000 to $48,000 per year, to include housing, books, supplies, and fees. A two-year college costs around $15,000 per year, which is still a hefty amount. This multiplies if you are facing tuition costs for more than one child or your student is seeking a professional or specialized degree. However, there are options available to parents that make facing this challenge easier.
While private loans are often thought upon as the golden standard of parent lending, parents do have an additional option with the federal government that comes with greater protections, securities, expansive repayment options, and are willing to work with you over the life of your loan. Conversely, there are private loan vendors that specialize in higher education that are available to assist.
Before we present our best loan options, let us review a set of standard questions to assist you before you get started.
What is a Parent Loan?
A parent loan is a loan that a parent or caregiver takes out to cover the cost of tuition for their child when all other means of financial aid have been exhausted.
One aspect of parent borrowing you should be made aware of of before signing a loan for your child is that you are held to different standards than students are with individual loans. This is true regarding limits, responsibility of the loan, credit impact, interest rates, and how the loan impacts your future. You are not starting your career, thus taking on considerable debt in the middle of your life or later, as opposed to a student, can impact your foreseeable future. Thus, it is important to understand how loans may affect you and create a realistic budget of your expected funds over the next ten to fifteen years of your life as you face repayment.
Steps to Take Before Choosing a Loan
Before choosing which loan is available to you, we recommend that you consider the following first steps.
- Exhaust Your Resources. Make sure your child has exhausted all other types of loans, grants, and scholarships available. Sometimes this requires you to get creative! There are thousands of scholarships available, and some are offered directly through your university or college. Special funds are generally withheld each semester or quarter and available to qualifying students as general relief, but this is not always advertised or shared. It is highly recommended that you speak with a financial aid representative with your child before taking out a parent loan to be sure you have covered all available steps.
- Determine How Much You Can Afford (And for How long). The second step to is consider how much you can truly afford and for how long. As with any loan, debt against you is nothing to take lightly. It can affect your credit, ability to purchase a home, car, and puts strain on your monthly budget. Moreover, depending on how much your child needs and your financial output, this could be a long-term payment, so considering what your plans may include for your future is another point to consider.
- Adjust as Needed. It goes without saying that not all universities, colleges, and schools are the same. If you find you cannot afford to take out and repay a hefty loan, there are hundreds of affordable education options available to you that may alleviate the need for a parent loan, or reduce the amount of money you will have to contribute. While it may not be the most popular option, choosing a more affordable school may considerably lessen the stress and fiscal burden for both you and your child.
If you have decided that obtaining a loan for your child must be done, the next step is to choose your best loan option.
We know that funding education can be stressful.
Here are options that can help.
Best Parent Loans
Parent PLUS Loans or Direct Plus Loan
Fixed rate: 5.30%
A Parent PLUS federal loan (sometimes called Direct PLUS Loans) are loans parents can take to fund the full tuition of their undergraduate, graduate, professional student (less for what they qualified independently). This is not to be confused with PLUS loans, which are federal loans that graduate or professional students can take out without the assistance of their parents. Parent PLUS loans are issued from the Department of Education to your college or university, and any remaining funds are given to your child as a refund. These are often used to cover living and supply expenses. If your student is a graduate or professional student, they likely qualify for their own PLUS Loan.
- You can take out as much as you need within the amount offered to you
- Credit is considered, but there is flexibility.
- You can appeal if you are denied based on circumstance
- The amount owed CANNOT be transferred to your child. Parents are responsible for the loan.
- Low, fixed rates
- A loan fee is applied (reducing the amount your child receives)
- Loans are not forgiven in the event their child is permanently disabled
- Child must be enrolled at least half time
- Deferment is available until your child graduates, plus a six-month grace period
- Interest accrues during non-payment
- Federal loans typically come with more options, protections, and assistance if your income changes and cannot pay than private loans do
- Appeal process for those who have bankruptcy
- Easier loan to obtain if you have struggled with your credit
- Available for income driven payment plans or loan forgiveness pending current policy
- Standard Repayment Plan: fixed monthly payment for up to 10 years, with consolidation options that extends the life of the loan up to 30 years.
- Graduated Repayment Plan: payments start off low and increase very two years, over the period of 10 years.
- Extended Repayment Plan: available only when you owe more than $30,000. This allows you to make your payments over 25 years by following the fixed or graduate payment plan.
Private Loan Disclaimer
You should be made aware that your child can most likely take out private loans without your assistance, through higher education vendors such as Sallie Mae, and other specific student loan lenders. Banks require higher credit profiles and may be more difficult to obtain, but it is not impossible. However, higher education servicers are more equipped and ready to work with your child, despite the fact they may not have established credit. In fact, the most you may have to do is cosign for the loan, which is still a liability, but relieves you from the initial debt, and holds your child accountable for repayment. Therefore, there are very few instances wherein a parent would have to take out student loan for their child, but they do occur.
Possible reasons may include:
- Your child does not qualify for a personal loan even with a cosigner
- You obtain a better rate and payment options under your credit
- You want to pay for their education
- More choices and availability may be open to you
- You may qualify for larger amounts
Private Parent Loans
Private loans have been stigmatized as being difficult by some, but this is not always true. At times, private loans can shorter repayment periods, fixed or variable rates, and can have clearer processes, i.e. no hidden fees and are not subjected to changes through the federal government. Private loans are often taken through banks or higher education lenders like Sallie Mae, etc. and are privately regulated. They are based on your credit and you must follow their minimum and maximum guidelines. Please note that private parent loans are not to be confused with personal loans, which can be an option, but are often not set up to provide you with full funding or structured for student lending.
Death and Disability
In the event of a major disability or unforeseen event, such as death, private lenders may forgive the loan. While no one wants to factor this into their decision process, it will often be apart of the language of your loan contract and is one point of consideration.
One aspect of private loan lending is that repayment is not as flexible. With federal loans you can go on a payment plan based on your financial situation, there are hardship considerations, and depending on your employment, you can have your loan forgiven. This is not likely the case with private loans. If you run into hardship, there are limited options.
Private loans also do not come with the added padding of deferment. Your repayment begins the moment your loan is dispersed. This may or may not be ideal for your situation and is one aspect of private lending to strongly consider. Most of the time, loans come with a ten-year or fifteen-year repayment plan. If you are needing extended periods of repayment, we recommend searching specifically for repayment terms that meet your needs.
What to Expect
Private loans vary from lender to lender, depend on your credit profile, income, and many other factors. Therefore, there is no one right answer to this solution. In general, you will want to select the lender that has a high customer approval rating, is clearly vetted and is known for their customer service, offers the lowest rates, lowest payments, and has a repayment schedule that works for your long-term goals. Given the current economic climate, consider asking your loan lander if there are any protections in place in the event of school closure or unexpected job loss.
Be cautious of lenders that come with hidden fees and penalties associated with skipping a payment or being late. Try, if you can, to avoid lenders that force you to pay application fees, origination fees, or charge you a penalty fee for paying off your loan early. Make sure you read the fine print and ask questions before ever taking a loan.
Private Parent Loan Lenders
Here is a list of private lenders that could assist. However, be sure to cross reference these with your local bank or against other financial institutions to be sure you are receiving the best rate and plan possible.
- Citizens Bank offers no-fee, parent student loans that come with the ability to refinance through the life of the loan. In addition, Citizens bank allows you to take to advantage of as interest rates as low as 2.13 % and allows you to pay only on your interest while your child is in school. Their payment options extend from 5-10 years, respectively.
- R.I.S.L. A (Rhode Island Student Loan Authority) offers nationwide parent loans at a fixed rate of 4.64%. RISLA is non-profit, which is rare among loan lenders and comes with the perk of no origination fees and flexible customer services. Although RISLA requires immediate payments on all parent loans, they estimate you will pay $106 per month for every $10,000 you borrow and offer lower rates for autopayment. Lastly, RISLA repayments are set at 10 years, which is optimal for those who want to repay their loan as quickly as possible.
- Discover offers a fixed or variable parent loan option ranging from 4.37%-14.74%, contingent upon credit up to the cost of full tuition. Additionally, Discover charges zero fees on their loans and an auto debt rate reduction for those who can make automatic payments. Discover also offers 15-year repayment plans and asks that you only repay the interest while your child is in school. Unlike some, to obtain a loan, your child must be in good standing with their establishment. However, Discover offers repayment assistance for those facing hardship, which too is rare and something to consider when applying for a private loan.
- Sallie Mae Parent Loans offer fixed and variable rates from 3.50% to13.87% and will cover 100% of your child’s tuition without any origination or processing fees. While Sallie Mae is a reputable, long standing loan servicer, their information and specifics on their loan types is scant. Therefore, it is recommended you call to ask more questions and get the full details of the loan. In addition, the fine print is long. Be sure you read it fully before pursuing with this lender.
Compare to Save
Student loans make banks and lenders considerable amounts of money, especially if interest accrues on the life of the loan over the years your student is in school. For those reaching for graduate or to obtain their doctorate, this could stretch over ten years of fees. This is one reason banks and lenders vie for your business and will do whatever they can to guide you to choose their program over others. Do not fall prey to lender techniques. While it may be true that they could offer you more in one domain than the other, the best bet is to decide this for yourself, through strategic comparing, creating a budget, factoring in future costs, and staying within your monthly capacity. However, do not apply for several loans at a time–this could damage your credit. You will want to consider your options before, to minimize any damages multiple inquiries has on your credit score.
While for most students, attending college is one of the most empowering and forward moments of their life, it can come with financial hardship and the inability to pay for soaring education costs. At times, extra help is needed, which often translates into defaulting to their parents or caregivers to front their education bill. If this occurs, it is important to know that there are loan options out there designed to meet your needs and capacity for repayment. Just remember to ask questions, create your budget, and choose the loan option that will not only work for your present situation, but your future.