Understanding the Challenge
Providing children with a higher education is a common aspiration among parents, but rising college costs pose a significant financial hurdle. Despite this, many parents seek ways to support their children’s educational pursuits while managing the associated expenses.
Exploring Parent Borrower Options
When it comes to funding college, parents often face the challenge of covering the gap between available financial aid and total cost of attendance, also known as the net cost or your remaining out-of-pocket cost. Federal Direct Parent Plus Loans and private student loans are two common options available to parents to bridge this gap.
Federal Direct Parent Plus Loans
Federal Direct Parent Plus Loans offer parents a viable solution to finance their dependent children’s undergraduate education, covering the cost of attendance minus any aid, grants, and scholarships. While these loans involve a light credit check and no income requirements, enabling you to access funds, there’s a risk of borrowing beyond your means and jeopardizing your financial stability. To make informed decisions, you must understand essential details such as their current and projected loan amounts, interest rates, and anticipated repayment obligations.
Tip: Use a basic loan calculator. Input what you expect to borrow to finance your child’s entire education. Use the current interest rate for Parent Plus loans (8.05%). If you borrow $25,000 per year, by the end you will owe $100,000 plus any accumulated interest. A monthly payment would be at least $1,200 to pay it off in 10 years.
Know that you cannot transfer or assign Parent Plus loans to a child. You are legally responsible for the loan regardless of any agreement you have with your child. Additionally, it’s common for children to have their own financial obligations post-graduation, making it uncertain whether they can help you repay these loans.
Loan Benefits and Challenges
Parent Plus Loans provide options for deferment or forbearance if you are struggling to repay, are eligible for forgiveness programs, and are dischargeable upon death. However, it’s important to note that these loans typically come with higher interest rates and more limited repayment options compared to loans issued to student borrowers.
Maximizing Loan Benefits
Parents can take proactive steps to minimize the financial burden associated with Parent Plus Loans, such as exploring income-driven repayment plans and forgiveness programs. Understanding the loan’s terms and potential strategies for managing repayment can help alleviate financial stress.
Tip: If you’re having difficulty affording any available payment plan as a Parent Plus borrower, consider the Parent Plus Loophole. This workaround may provide access to cheaper repayment plans like SAVE, but it involves a complex process of consolidations and manual applications. The government is aware of the loophole but is allowing borrowers to take advantage of it until July 2025. Visit our website for more information and contact us for an appointment.
Private Student Loans
The second and usually less desirable option for funding the payment gap mentioned above, would be to take out private student loans. Terms will vary from lender to lender, and these loans do not offer most of the protections available in the federal system such as payments based on income and forgiveness and discharge programs.
Key Considerations
Private student loans offer varying terms and interest rates, often requiring a creditworthy co-signer. Parents should carefully evaluate the loan’s terms, repayment options, and potential implications before committing. In general, federal Parent Plus loans are better.
Caution: Co-signing on private student loans means assuming full responsibility for the debt. If you co-sign a loan and the primary borrower cannot pay, your credit will be negatively impacted and you may be subject to a lawsuits unaffordable.
Tip: Beware of variable interest rates. Private loan interest rates can be fixed or variable. While variable rates may seem appealing in a low-interest-rate environment, they can become burdensome if rates rise unexpectedly, making payments unaffordable as seen in recent years. Currently, interest rates on private loans can reach 13%-15%, nearing credit card levels. However, fixed-rate loans offer stability, and if taken out in a high-interest-rate environment, may allow for refinancing as rates decrease.
Managing Private Loan Debt
Parents facing challenges with private student loan debt should explore refinancing into a lower fixed interest rate. Get quotes from different lenders to select your best option. You do not need to refinance with your same lender and some lenders don’t offer this option. Borrowers can also request interest-only payments or forbearance as short-term measures to prevent delinquency and default. However, if you find yourself in this situation, assess your ability to repay long-term. If the loans are in default, explore settlement options. Seeking advice from financial professionals or legal aid organizations can provide guidance on navigating repayment difficulties.
Final Thoughts and Resources
Making Informed Decisions
Parents should prioritize exploring all available financial aid options, including federal loans and institutional aid, before considering private loans. Understanding the total cost of education and potential repayment obligations is essential for informed decision-making. Remember that the goal is for your child to get an education and that should be the focus. Getting an affordable education is still possible. Getting the “college experience” without regard to the cost, is unlikely to result in a good return on investment long term and may risk you and your entire family’s financial security.
Seeking Assistance
For parents grappling with student loan debt, resources such as financial aid offices, EDCAP consultations, and legal aid organizations offer valuable support and guidance. Empowering parents with knowledge and resources can help them effectively manage their financial obligations and support their children’s educational aspirations.
FAQ
No. Parent Plus loans are available to help pay for a dependent’s undergraduate degree.
You can borrow up to the difference between the Cost of Attendance and the total amount of aid the student will receive. In the example below, the annual COA is $35,000 and the student received a total of $19,500 in aid, including federal student loans. That leaves a balance (or net cost) of $15,500. The parent can borrow up to that amount in Parent Plus loans:
| Cost of Attendance | $35,000 |
|---|---|
| Federal Student Loans | $5,500 |
| Grants and Total Scholarships | $14,000 |
| Total Aid | $19,500 |
| Net Cost | $15,500 |
- The endorser’s credit may be impacted if the primary borrower defaults. However, federal student loans, including Parent Plus loans, are dischargeable in case of the borrower's death, relieving the endorser of responsibility. This differs from private loan co-signers.
- If the borrower qualifies for discharge or loan forgiveness due to disability or public service, the endorser is not obligated to pay.
- For further details on the endorser's obligations, refer to the Direct Plus Loan Master Promissory Note.
Parent Plus loans are granted to one parent and require a credit check, albeit with less stringent standards than private loans. If the parent fails to meet credit requirements, the government may require an endorser. An endorser on a federal Plus loan is akin to a co-signer on a private loan but with notable differences:
Parent Plus borrowers typically encounter higher interest rates compared to federal loans issued to students. These rates cannot be refinanced or lowered within the federal system. Additionally, Parent Plus loans are not eligible for the more affordable repayment plans like SAVE.
- If you are married and file your taxes jointly, payments in an IDR plan such as ICR will be based on your combined income. If you file your taxes separately the payment will be based on your income alone. (Consult an accountant before changing tax-filing status).
- Consider having the spouse with lower income take out the loans and file taxes separately to make payments more manageable.
- Forgiveness programs like PSLF and IDR Forgiveness require that you accumulate qualifying payment credit (for 10-25 years depending on which program you’re pursuing). But you will not get credit while you are in a school deferment, even if you make payments. If you are pursuing one of these programs, you can waive the in-school deferment when you obtain your loan and start getting credit towards forgiveness right away. Too often, Parent Plus borrowers spend years in deferment and miss the opportunity to eliminate their debt sooner.
- Remember the Total and Permanent Disability (TPD) Discharge option, which offers debt relief for borrowers with qualifying disabilities.
Here are some strategies:
The Parent Plus Loophole provides an alternative for borrowers struggling with repayment plans. By exploiting this method, borrowers may access cheaper repayment plans such as SAVE. Although it involves a complex process of consolidations and manual applications, it offers potential relief. The loophole is available until July 2025.
Generally, schools will give borrowers some private lender options. But borrowers should shop around until they find a loan with the most attractive terms. The lower the interest rate and the longer the payback period, the lower your monthly payment will be. Young student borrowers who have limited credit history will require a co-signer. Most often, that is one or both parents (though it can be anyone who is willing). Loan terms will be determined by the creditworthiness of the primary borrower (the student) and more importantly, the co-signer. The better your credit score, the better deal you will get.
Co-signing a private loan entails assuming full responsibility for the debt if the primary borrower cannot pay. Delinquencies and defaults can impact your credit report, and you may be sued by the lender alongside the primary borrower.
Yes, there could be situations where a private loan is preferable. For instance, if you have a Parent Plus loan with a high fixed interest rate, refinancing into a private loan with a lower rate might make sense, especially if you're not pursuing forgiveness or discharge in the federal system.
You can request forbearance or a reduced payment from the lender, although unpaid interest during these periods will accumulate.
Private loans have a Statute of Limitations, after which the lender cannot pursue legal action to collect the debt. Seek advice from financial professionals or legal aid organizations for assistance with private student loan debt management.