Experiencing a child get into college is one of life’s great joys for a parent. Figuring out how to pay for college, however, is stressful for parents, especially for single parent families. With college costs skyrocketing over the last decade, single parents need options to help their children pay for college. Luckily, there are several available ways single parents can help pay for their child’s college education.
Expected Family Contribution Explained
While parents aren’t required to pay for their child’s college expenses, the federal government does put a number on how much a parent should be expected to pay. This can affect the amount of money available for a college student through grants for education programs and loans.
This is calculated when filling out the Free Application for Federal Student Aid (FAFSA) and is referred to as Expected Family Contribution (EFC).
Several factors go into how the government calculates your EFC, including your family’s income, assets such as a home, your family size, and how many family members are attending college at the same time. Your Expected Family Contribution is used by schools to estimate financial aid needs.
Generally, a lower ECF makes you eligible for more financial aid. A higher ECF might leave parents having to look for other options to finish paying college costs, like unsubsidized loans.
To estimate your Expected Family Contribution, use the College Board’s EFC Calculator.
A child’s cost of admission factors into how much need-based financial aid they can receive as well. Take the cost of admission and subtract your EFC to determine the amount of financial aid needed to pay for college. One thing to keep in mind is that your financial aid package can’t exceed the cost of attendance.
For example, if your child’s cost of admission is $15,000 and your Expected Family Contribution is $7,000, you can’t receive more than $8,000 in need-based financial aid. Depending on your situation, children of single parents could be eligible for more need-based aid than other families.
Advance Planning with 529 Accounts
One way single parents can help pay for their child’s college education before they ever step foot on a college campus is by investing in a 529 plan for their child. 529 plans have two variations available: Prepaid Tuition Plans and Education Savings Plans. 529 Plans are available in fifty states and the District of Columbia. To see what’s available in your state, refer to the College Savings Plans Network’s 529 Plan Comparison By State feature.
One of the main benefits of 529 plans is that withdrawals aren’t taxed by the federal government when used for eligible college expenses. 529 accounts can be set up at any time so single parents should take advantage of this option to fund their child’s future education, which might help them avoid costly student loans in the future.
Student Loan Options for Single Parents
Besides advanced planning with 529 plans, single parents have many options when it comes to helping pay for their child’s college education. Some options are better than others and some should only be used in specific circumstances. Below are some of the best student loans for single moms or dads.
Cosigning a Private Student Loan
Because most current or prospective college students don’t have any credit history, often they look to their parents to cosign on private student loans. Federal student loans don’t require a cosigner, but private loans do. For single parents, keep in mind that while the financial responsibility of private loans would lie on your child, you are considered a co-borrower and lenders will come to you the second your child is late or misses a payment.
Any late payments or any defaulted loan will show up as the same on the cosigner’s credit report. Cosigning on a student loan can also affect your credit report in another way. If you are a parent looking to establish any new credit, such as buying a home or refinancing a mortgage, your child’s student loan debt will affect your debt to income ratio and make it harder to get approved.
When cosigning on a student loan your credit history, credit score, and other financial information taken into account, which can affect the interest rate and repayment terms set up by the lender. It’s always better if the cosigner has good to excellent credit in order to score the lowest possible interest rate.
One option for parents who co-sign on a student loan is to request a cosigner release. It’s not easy to get approved and isn’t offered by every lender so check with your student loan provider to see if it’s an option. If your student loan lender does offer a cosigner release provision, most likely it will be tough to get approved but can provide much-needed relief to parents and other cosigners.
Most lenders who provide the cosigner release option require a specific number of on-time payments, usually between 12 and 36 months. Other requirements are the student has to graduate and then reach a certain credit score and income. Basically, the student needs to no longer be a loan risk in order for a cosigner to be released from responsibility of a student loan.
Private Student Loans
Another option for single parents looking to help pay for their child’s college education is to take out a private student loan themselves. While this option is available to parents, most of the time this is a poor choice unless you are well off financially. Obviously, if you take out private student loans for your child in your name, you are the only one financially responsible for that debt.
Private loans tend to have higher interest rates and fees than federal student loans. Also, private student loans offer limited options in terms of student loan forgiveness for single moms and dads. It would be better to avoid this option if possible.
Parent Plus Loans
For parents, the federal government offers a student loan option called the Parent Plus loan.
Parent Plus loans are direct federal loans taken out by parents of students as a way to fund their child’s education. Parent Plus loans allow parents to borrow as much as needed to pay for their child’s college costs.
Similar to private loans, Parent Plus loans require a credit check. One negative to Parent Plus loans is their high origination fee. An origination fee is a fee charged upfront by a lender for setting up a loan and processing your loan application. Parent Plus loans have a 4.248% origination fee (October 1, 2018 – September 30, 2019). If you were taking out a $50,000 Parent Plus loan for your child, the loan origination fee would be $2,140.
Parent Plus loans also have a fixed interest rate, which is set at 7.595% (July 1, 2018 and June 30, 2019). Parents must complete and submit a Free Application for Federal Student Aid (FAFSA) form to be eligible. Note that with Parent Plus loans, your student loan bill comes as soon as your loans are fully distributed.
Income Contingent Repayment Program
For middle-class single parents who are looking into Parent Plus loans, you may have an option for student loan forgiveness. That forgiveness plan is called the Income Contingent Repayment (ICR) Program. This would be an option for parents with a large amount of student loan debt, upwards of five and six-figure student loan debt.
ICR only works if you choose to consolidate your Parent Plus loans. Only then would you be eligible for Public Service Loan Forgiveness.
So many parents miss out on possible loan forgiveness because they don’t understand their options. For more detailed information about this program, check out our detailed breakdown of Parent PLUS Loan Forgiveness for Middle-Class Retirees.
One of the best things parents can do to save money on their student loan debt is to schedule a consultation with Student Loan Planner. We make custom student loan plans for families who owe more than $100,000, and we’ve even counseled individuals who owe $1 million. If you need help determining strategies for repaying federal Parent PLUS loans, reach out today.
We’d love to show you much money you could potentially save you on your Parent PLUS loans.
Home Equity Loan
Many parents choose to take out a home equity loan in order to fund their child’s college education. One reason parents do this is because home equity loans generally have lower interest rates than student loans. There are drawbacks to taking out a home equity loan to pay off student loans, though, that make it a terrible option for parents.
One main issue is that you are putting your house up as collateral and if something were to happen that would keep you from making those loan payments, you could lose your house. While you used to be able to deduct the interest from your Home Equity Line of Credit (HELOC), new tax laws put in place in 2018 make that bonus a thing of the past unless you specifically use your HELOC to make buy or make improvements to your first or second house. Because of that change, taking out a home equity loan just doesn’t make that much sense for single parents helping pay their child’s college education.
Borrow from your Retirement Fund
Another option for single parents helping to pay for their child’s college education is to tap into their retirement savings. There are very few reasons anyone should ever pull money from their retirement funds and using it to pay for your child’s college education isn’t the best option.
There are tax implications related to taking money out for education expenses. Parents who are under the age of 59 and a half might owe taxes depending on whether they borrowed from a traditional or Roth IRA. The amount of money parents take out also factors in as well.
With 401(k) plans you can borrow half the vested balance or up to $50,000, whichever amount is smaller. With a 401(k) plan, parents would have to pay a 10% tax penalty in addition to ordinary income taxes on the money they withdrew for college expenses. Because you can’t borrow to pay for retirement, it would be wise for parents to leave retirement savings alone and find student loan funding options elsewhere.
How to Escape Student Loan Debt By Refinancing Student Loans
Just like college graduates can refinance their student loans, so can parents who took out student loans. By refinancing your student loans, you can work to get a lower interest rate, which will save you money immediately. When refinancing student loans, you will be required to submit various financial records and be subject to a check of your credit. The better your credit, the better your interest rate and repayment terms will end up.
Another option with refinancing is to transfer your student loan responsibility to your child. Perhaps they have graduated from college, have a good paying job and have established credit.
You have the option of allowing them to take the reins and finish paying off student loans that funded their college education. Not all lenders give this option. Lenders that do offer this option include Laurel Road and Commonbond. If you click on our referral links, you can receive cash back bonuses for refinancing your student loan through Laurel Road and Commonbond.
Single parents can help pay for their child’s college education because there are several options available. While it’s always better to plan ahead with options like 529 plans, parents have options no matter what circumstances they find themselves in.
Student Loan Planner can help provide a comprehensive plan for paying back student loan debt, saving you thousands of dollars and providing peace of mind with your financial decisions.
Have you considered any of these options to help pay for your child’s college? If so, which one would work best for your situation?