Should you Take Out a Parent Loan to Fund Your Kid’s College Cost?

College application season has become a nightmare for parents. While students worry about admission, parents fear college costs. Most parents have admitted that they don’t even know how they can manage the cost. Sky-high college costs make parents panic-stricken instead of proud of the child’s bright future.

Many Parents confess they didn’t save (or save enough) money for their child’s education. They don’t see how they can afford thousands for tuition, fees, books and other costs.

And yet, they want their child to have a college education and the value and earning power that brings.

So, the million (or at least hundred thousand) dollar question is: How do you pay for your child’s college when you haven’t saved nearly enough?

Start with the FAFSA

The first step to take in paying for your child’s college education is to fill out the FAFSA (Free Application for Federal Student Aid). The FAFSA determines your child’s eligibility for need-based financial assistance (grants, loans, school and even some private scholarships). Even if you don’t think you qualify for need-based assistance or don’t want to take out any loans, it’s still in your interest to fill out the FAFSA.

Your FAFSA results will determine the federal aid your child qualifies for. The 2017-18 application launches October 1, 2016. Check with your school or the FAFSA website to find your actual deadline. Since some private scholarships rely on FAFSA eligibility, the earlier you fill it out the better.

To fill out the FAFSA, you need to provide income, net worth (assets/liabilities) and driver’s license numbers for both you and your child. Get your completed tax returns out, you’ll need those too!

(If you aren’t ready to apply for aid for next year, you can use FAFSA4caster to start making your estimates.)

Once you have your results, it will be time to start considering your options.

Consider Federal Parent Loans

Many parents want to pay for their child’s education even if they don’t have the money now. That means a lot of parents at least think about taking out a parent loan to pay for it. Some parents use the equity in their home and pay for tuition with HELOCs. But that puts one’s house at risk, so many others look to the federal parent loans available.

Every school keeps a “cost of attendance” that includes tuition costs, fees, expenses, the cost of textbooks, room and board. Parent PLUS loans allow parents to borrow up to the full cost attendance minus any aid given to the student.

Example:

A student’s cost of attendance is $25,000 per year.  He receives $6,000 in subsidized and unsubsidized loans., The parent of that student can borrow up to $19,000.

How can you apply for Parent PLUS loan?

After you’ve completed the FAFSA and have determined the school your child is attending, you can fill out a Direct PLUS Loan request.

To qualify for a parental PLUS loan, you must be or be married to the biological or adoptive parent of a dependent undergraduate student.

Qualifying for a PLUS loan can be tough because it’s dependent on the parent’s credit. Having a bad credit score may disqualify a parent for PLUS loans.

If the parent can’t get a PLUS loan due to their bad credit history, then the undergraduate may take out an extra unsubsidized loan. It’s best for the student or parent to contact the school’s financial aid office for detailed information.

How can you repay Plus loan?

A parent can expect to start payments 60 days after the last disbursement. Some parents choose to start payment up to 6 months after the child is no longer attending school. But since interest starts accruing before payments are due, parents may want to begin paying the loan down earlier.

Federal repayment options are available to pay off the PLUS loan. Parents can choose 10 or 20 year payment plans.

Parent should think twice before taking out a student loan

One of the problems with taking out a parent PLUS loan is that many of the parents who haven’t saved enough for college ALSO haven’t saved enough for retirement.

Parents should prioritize retirement savings over funding their kid’s college education. One of the most common sayings is “There are loans for college, but no loans for retirement.”

Because there aren’t.

Taking out loan debt to fund your child’s education may lead you to work longer or may even drop your standard of living in retirement.

It is advisable to save at least 15% of income for retirement first before worrying about funding your child’s college education. You want to make sure your need to pay back your loans doesn’t reduce your ability to do that.

You may not want your child to start off their post-college career with a load of student debt, but your well-educated child may be far more able to take on the debt than you are. Older parent with retirement quickly approaching need to be particularly cautious. Plus, students have way more flexibility in paying back their loans.

The Student Loan Variation

One way parents can get around this dilemma is to take loans in the student’s name and then help with the payments. This way you assist your child with their education, but if your ability to pay the loan off and take care of your own future sufficiently falters, the responsibility for paying the loan (like the education itself) is the student’s.

Parents can keep student loans from ballooning by paying off interest during school. They can also make or contribute to payments afterwards. While it doesn’t eliminate your child’s debt load, it does reduce it and make it more manageable.

This approach needs a lot of coordination with your child (as should most of the approaches to funding their education.) Your child needs to understand what debt means to you, to them, and to the future. Explain your situation fully, and make sure they understand as well.

Types of federal student loan

Federal student loans offer lower interest rates and have more flexible repayment options. There are mainly 2 types of federal student loan 1) Direct loan program and 2) Perkins loan program.

Four types of loans are available under the direct loan program, which are Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans and Direct Consolidation Loans.

Usually, a student  is eligible for both subsidized and unsubsidized loans.

In a Direct subsidized loan, the government pays the interest when the student is in school. The interest rate is nearly 6.8%. This loan is for students who have a financial hardship and the family’s total income is below $50,000.

In a Direct unsubsidized loan, you must pay off the interest on the loan you borrowed. Graduate, undergraduate, professional students are eligible for this loan. No need to prove a financial hardship for qualifying this loan.

In Perkins loans, the interest rate is fixed. The student has to attend a participating school to become eligible for this loan. This is mainly a school-based loan program to help needy students. You can contact the school’s financial aid office for more information.

Reduce the Debt by Reducing the Cost

Taking on debt is tempting when you have not saved much for your child’s education, but there are other options. You should explore options that make college more affordable instead of blindly taking on more debt than you or your child can afford.

Should you Take Out a Parent Loan to Fund Your Kid's College Cost?

Consider lower cost schools

Does your child has her heart set an expensive private school? If she doesn’t get much in the way of financial help to attend, maybe she should consider a less expensive school. Attending a public state school or even a couple of years at a community college can drop her education costs by thousands.

We’ve all heard of the safety school. It’s that school students apply to “just in case” they don’t get in their dream school. But students also should pick an affordable financial safety school during their application process that will allow them to pursue their education at a reasonable price. Many students are perfectly happy at their second choice schools, particularly because they aren’t adding up lots of debt.

Even if your student spends a couple of years at a less expensive school and then transfers to their preferred school, it can save you all a lot of money.

Take advantage of work or federal work-study

Some schools receive a subsidy from the Government to pay a student who works part time on the school campus or at a non-profit agency. A responsible student, who is ready to balance part-time work and study, can sign up for this federal work-study program.

Even if a student doesn’t qualify for work-study programs, it’s a good idea for them to cover at least some of their expenses with a part-time or summer job. Even if the student only covers books, that’s a few hundred a semester less in loans accruing.

Apply for scholarships and grants

Grant money or scholarships come from federal government, state government, college or career school, or a private or non-profit organization. Some of the grants and scholarships are need-based, but some aren’t.

Students should start applying early in high school. And they should keep applying to different scholarships throughout their college career.

While a lot of students only apply for big scholarships, those tend to have big pools. Applying for multiple small scholarships can have a terrific ROI, since many have small applicant pools. There are a number of websites dedicated to helping students find scholarships. it also never hurts to check with the child’s guidance counselor or college financial aid office for more suggestions and, well, guidance.

Consider tuition payment plans

A tuition payment plan can be a good option for parents who can afford monthly payments to cover part or all of a tuition bill, but not the full bill at the start of term. There is a small fee to set up a payment plan at most schools, but they are interest-free and considered a cost-effective option for parents who can pay out of their cash flow.

However, if you miss payments, your child may not get their degree or transcripts until the bill is paid off.

Other Options

  • Military Options: While not for everyone, a term in the military gives our servicemen and servicewomen terrific education benefits through the GI Bill that they can use during or after enlistment.
  • A Working Gap Year: If your student can take a year off to work and save, that’s a bit more time for you and the student to put together a tuition plan.
  • Commuting: If your child picks a school close to home, they can reduce room and board costs by living at home.
  • Getting Credit through AP and CLEP tests: If a student can reduce the number of semesters they need to attend college, they can save a lot of money. Many schools give students credit for taking and passing Advanced Placement (AP) tests in high school, and some will also honor the results of College Level Examination Program (CLEP) tests, which can be taken any time.

So, parents should accept the fact that the child is not going to be the great Isaac Newton. Maybe it’s not worth to spend millions on an expensive college.

Just tell me “how much in student loana was taken by the great Isaac Newton’s parent?”

Yes, children are costly now. They bring joy along with painful bills!

 

Author’s Bio: Amy Nickson is a web enthusiast. She is associated with ovlg.com where she shares her expertise through her crisp and well ­researched articles based on money management, money saving ideas, debt and so on.

 

10 thoughts on “Should you Take Out a Parent Loan to Fund Your Kid’s College Cost?

  1. Our goal is to borrow as least as possible. We are looking at merit, scholarships and grants. AP and CLEP exams too. Our children plan on working during college and summers to help cash flows expenses. We are all working together to come out with as little debt as possible. Exciting and scary times all at once.
    Brian @ Debt Discipline recently posted…Interview Series: Solving FinanceMy Profile

  2. Very informative – the FAFSA is available sooner than it used to be. I admit, I am dreading this. But, it’s something I have to start dealing with very, very soon, as my son is a junior in high school. I will not take out a parent loan. We have some saved in a 529, probably enough for one year in a 4 year college, but it would cover the full two years at a community college, so it’s a start.

    Yes to a work-study or other part time job! I worked all through undergrad and grad school, with the money going directly to tuition, which helped tremendously!
    Amanda @ centsiblyrich recently posted…Weekend Money Tip: Decorate your home the DIY way to save money!My Profile

    • Sounds like you are in a pretty good place, Amanda. You’ve saved up some. Your son has time to apply for numerous scholarships and to earn some money to help and can target his search to maximize your savings.

  3. Very good information, Amy!

    You are absolutely right about “many of the parents who haven’t saved enough for college ALSO haven’t saved enough for retirement”.

    Here is an idea that might work. As a parent:

    1. Save up for 1/3 of the college education cost in a 529.
    2. Pay for the 1/3 of the college education cost through your cash flow.
    3. Expect your kid to work and pay of the 1/3 of college education.

    –Michael
    Michael recently posted…Digit Savings – ReviewMy Profile

    • Michael, I think it would work if you have time and the available cash flow. I have 12 more years to save up, so saving for a third (or more) is very doable. I have friends who have seniors, and they are scrambling because they ran out of time for muchsavings. But, they still have time to steer their child to less expensive schools, apply for a lot of scholarships, and get in some budget tightening.

  4. Mr. Mt joined the Army after graduating, and it paid off his student loan debt. We loved our time in the military. So many good things have come from that one choice!
    I would be more willing to help pay for a child’s loan than take it on myself. That way if they fail or quite, they need to be responsible for the loan. I wouldn’t want to put myself in a spot of feeling bitter towards my kid about paying for a year of binge drinking and failed classes. For our oldest, we told him we would pay off any class he earned a B or better in. But anything lower was on him. We weren’t going to pay for subpar work.
    Ms. Montana recently posted…The Cost of a DreamMy Profile

    • Thanks for chiming in, Ms Montana. I think the military options can be really good for a number of reasons ( though I did not serve). When I was growing up near Fort Bragg, I knew lots of young soldiers who admitted that a stint before college helped them mature and be more organized before college as well as pay for it.

      I do think for the most part, it’s better for students to take on school debt than parents. The options for repayment are better. But, parents can help a lot by making sure the student understands debt and keeps it to a minimum, cashflowing what they can afford, and by making interest payments while the child is in school and even later.

  5. This is certainly a comprehensive examination of the available options for paying for college. My personal inclination would be to avoid parent loans or any loans for that matter. Full disclosure: I took out federal loans for my MA a few years ago, but I wish I had cash-flowed the degree in hindsight.

    If at all possible, saving in advance for children’s college is the way to go. If that isn’t feasible, I’m in favor of taking the community college route to save as much money as possible.

    Student loans are a scary proposition, and they get scarier each year that passes. I fear that student loans may be the next bubble to burst.
    FinanceSuperhero recently posted…The Herd Mentality and Retirement – How to Free Yourself and OthersMy Profile

    • Saving in advance is the way to go, but the average savings is less than $20K. And I read this week that in a lot of cases where people are saving, they are saving in cash and getting terrible returns. So this post was targeted to the folks who know they don’t have enough and need to make decisions in the near future.

      If our daughter was in high school and I knew we didn’t have enough saved, I think we’d first see if we could convince her to try the early college route, where high school students can take college classes as part of the public school offerings. If not, as many AP classes as she could take to reduce the amount of time she needed in her college degree, and as wide a scholarship search as possible.

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