Imagine sitting down with your kid to open their first college bill.
And it’s a whopper of a bill.
According to the College Board, the average 2018-19 bill for tuition, fees, room and board at an in-state public four-year school is $21,370.
If your child ends up going to private school or graduate or professional school, the cost could be far higher than that.
But this isn’t something to enter into without taking stock of whether parent student loans are truly right for you and, if so, exploring which are the best parent student loans.
Read on to learn what’s the best decision for you and your family.
Should you take out parent student loans?
First things first: parent student loans are pretty controversial among financial professionals — and for good reason.
It’s no secret that most families are struggling just to get by. Eight out of 10 workers are still living paycheck to- paycheck, according to a CareerBuilder survey. Most people don’t have adequate retirement savings, let alone an emergency fund, adequate insurance and other protective financial measures.
You might feel a powerful call to give your kid the biggest boost you can right out of the gate, and that’s an admirable desire. But in this area, airplane rules apply: put on your own oxygen mask first before helping others.
That means you should consider having the following areas crossed off your checklist before even thinking about taking out parent student loans:
- An on-track retirement savings plan
- A fully-funded emergency fund
- A manageable amount of your own debt (or, preferably, no debt)
In other words, you need to be on solid financial ground yourself before taking out parent student loans. And you need to be able to stay on solid financial ground, even after potentially adding on extra monthly payments from a parent student loan.
Parent student loans: when it can make sense
Aside from the obvious advantage of helping your child, there are a couple of other reasons you might consider taking out parent student loans.
1. Your child didn’t get enough financial aid. If your child’s financial aid package of scholarships and federal student loans can’t cover the cost of going to school, parent loans might be an option. This is likely to happen if they’re attending a pricey, out-of-state school or a private school. Insufficient aid might also come up if they’re going for an advanced or professional degree.
2. Your child doesn’t qualify for low rates. While federal student loans are generally better because they have a lot of protections, you might decide that getting a low interest rate for your kiddo is a priority. If that’s the case, private student loans might be a better option, especially if you have a good credit score and are willing to cosign on the loans.
Types of parent student loans
If you’ve decided parent student loans are still something worth looking into a bit further, the good news is that there are three main types, which we’ll cover in detail here.
Federal Parent PLUS Loans
Federal Parent PLUS Loans are the most common option for parent student loans. The benefits of this type of loan include:
- Federal loan protections: If you have trouble making your payments, you can apply for deferment or forbearance. You may even qualify for Public Service Loan Forgiveness (PSLF) if you consolidate your loans into a Direct Consolidation Loan.
- Easy to get: As long as you don’t have an adverse credit history, you can take out as much as your kid needs to attend college, minus the amount of financial aid they’ve received.
- Fixed interest rate: This gives you peace of mind that your monthly payment will always be the same.
On the flipside, there are downsides to federal Parent PLUS Loans, too. Here are a few reasons you might want to reconsider:
- High interest rates and fees: If you take out a Parent PLUS Loan for the 2018-19 school year, you’ll pay a 4.248% loan fee, plus an interest rate of 7.6% — that’s 2.55% more than an undergraduate Direct Loan your kid might take out.
- No automatic deferment: You’re expected to start making payments right away while your child is in school. You can, however, request that payments are deferred until six months after your kid leaves school. This increases the size of your loan due to interest accumulating, however.
- Parent PLUS Loans are entirely on you: Your kid can’t be in any way held legally responsible for these loans.
- No borrowing caps: You can potentially take out very large loans — far larger than you’re reasonably able to pay back. This can get you into trouble if you over-borrow.
How to get Parent PLUS Loans
If you’re interested in taking out these loans, you’ll need to check with your student’s financial aid office. Most schools have you apply for these loans on the StudentLoans.gov website while others require you to apply in different ways.
In either case, you’ll need to complete a Free Application for Federal Student Aid (FAFSA) with your child in order to apply for a Parent PLUS Loan.
Cosigned private student loans
Another popular option is to cosign for private student loans with your child. This approach has several pros and cons. A couple of benefits of cosigning a private student loan for your student are:
- Lower interest rates: If you have a good credit score, you may qualify for a lower interest rate than what federal student loans offer. On the flipside, if you have poor credit, you may get worse interest rates.
- You’re not the primary borrower: In this case, you only really helped your student get a loan and secure a lower rate with your good credit score. They’re primarily responsible for paying off the loan.
Although these advantages may seem like a win-win for your family, there are big risks to cosigning a private student loan for your child. Here are the cons to taking out a student loan as a cosigner:
- Your kid can hurt your credit: If your kid pays late even once, that late payment is recorded on your credit report, too. Worst-case scenario, you have to repay the loan entirely on your own if your student skips out on it.
- Few protections: There’s a reason federal student loans are generally favored — the interest on these loans can be paid while your child is in school. Plus, they may qualify for forgiveness. They also offer better repayment options and may be discharged if your child becomes disabled or dies. A private student loan doesn’t guarantee any of these protections — it all varies from lender to lender.
- Tougher to get: If you don’t have a good credit score, you might not get very good interest rates on a private loan. If you really don’t have a good credit score, you might be denied entirely.
Before opening a new private student loan for your child, weigh these pros and cons — carefully.
How to get cosigned private student loans
There’s no central place to get a cosigned private student loan. Rather, it’s just like shopping for any other loan: you’ll need to check with different lenders to find the one with the best rates and features that appeal to you.
Here are some lenders who will give out private student loans to kids with a parent cosigner:
Private parent student loans
Finally, the last option is to simply take out a private student loan entirely in your name. This means you’re not cosigning for a loan with your kid. Instead, you’re putting your name entirely on the line as being legally responsible for repaying the loan.
Just like with cosigned parent student loans, the interest rate on your loan is dictated by your credit score. A good score equals a good interest rate. This is pretty much the only potential benefit of taking out a private parent student loan on behalf of your child.
In contrast, there are a number of disadvantages to this option:
- Parent student loans are harder to find. Most private student loan lenders dole out loans to parents and students who are cosigning on the loan together. It’s a little tougher to find lenders willing to loan to just you, a parent.
- It comes with fewer protections. Again, since these are private student loans, they don’t come with all of the built-in protections that federal student loans have.
- You’re 100% responsible for repayment. This loan is entirely your own responsibility, legally. You can’t compel your kids to pay off the loan — consider this as a gift you’re giving them.
How to get private parent student loans
Applying for private parent student loans is basically identical to applying for cosigned private student loans. You’ll first need to find a lender willing to give you a loan for just yourself (and not your student).
Compare multiple lenders, pick the best parent student loan, and see if you qualify for competitive terms and rates.
3 alternatives to parent student loans
If you’ve looked at all the facts and decided parent student loans aren’t right for your family, that’s OK. They’re not for every family — or even most families.
But that doesn’t mean you’re entirely out of options. Here are some alternative approaches to consider with your child.
1. Help your child research financial aid and repayment options
There’s a whole world out there of scholarships, grants, tuition waivers and other options. If you don’t have any extra money to help see your kid off to school, you could donate your time in helping them research options they can apply for themselves.
Similarly, if your kid is already past their school years, you could also volunteer to help them navigate the choppy waters of figuring out how to repay their own student loans. If they’re having trouble making payments, for example, you could research the requirements and consequences for income-driven repayment plans, refinancing, student loan forgiveness options, etc.
The key is to do your research as well. The landscape of paying for college is forever changing, and what worked when you graduated might not cut it when it comes time for your kids. That’s why it’s important to approach all of your research from a fresh start, rather than using exclusively your own knowledge of how things worked when you were in school.
2. Help your child pay off their own student loans
You don’t necessarily need to add your own name to your child’s student loans to give them a leg up. You can still help your kid pay off their own student loans in various ways.
For example, if you get a bonus at work, you could decide to apply it to your child’s student loans. Or, if your kid didn’t receive subsidized federal student loans (i.e., interest payments are adding up while they’re still in school), you could decide to make those interest payments for them and give them a de-facto subsidized federal student loan.
The advantage of going this route is that you’re still able to help out your kid, but you’re not legally attached to that debt. If you need to take a break — such as to beef up your own retirement savings or emergency fund, for example — you can do so without suffering any consequences.
3. Apply for cosigner release or refinance
If you cosigned on private student loans for your child, you should know that you might not necessarily always be legally responsible for that debt until it’s paid off. You can try getting out of the contract in two ways:
- Applying for cosigner release, or
- Having your child refinance the loan in their own name
A cosigner release means the student asks the lender to release your name from the loan. Thus, the loan is entirely in your child’s name, and you’re not listed on the loan anymore. It will eventually fall off of your credit report, and if your kid later makes a late payment or defaults on the loan, your credit score won’t be affected.
Not all private student loan lenders offer cosigner release. If you think you might be interested in this in the future, it’s worth sticking with a lender that does offer this option. But even if is, most lenders have a policy in place saying your kid must make a certain number of on-time payments before they’ll consider it.
If the lender doesn’t offer a cosigner release or if you’d like to try and get even lower rates on the loan, another option is to refinance the private student loan. Your child can apply for a brand-new loan in their own name. They can do this at any time, but their chances of being approved generally go up if they have a good credit score and are earning a good income.
Parent student loans may or may not work for you
As Uncle Ben Parker said: “With great power comes great responsibility.” Parent student loans generally aren’t as good as a proposition as student loans taken out by — well — your student.
If you’re not sure whether taking out parent student loans is right for you, it never hurts to consult with a fee-only financial adviser who can look over your entire financial picture. Taking a little bit of time now to plan out your kid’s education financing can save you years of heartache down the road.
After all, the last thing you want to do is to guilt your kid into changing your diapers when you’re elderly because you spent all your retirement money on their education.