If you want to help your child pay for their college education, you’re not alone.
According to Sallie Mae’s report, How America Pays for College, parental income and savings combine to make up the second-highest resource for college students.
But if you don’t have the income and savings required to meet your own financial needs while helping your student, you may be considering borrowing money.
According to the Sallie Mae report, nearly half of the money parents borrowed came through the Parent PLUS Loan program.
But are Parent PLUS Loans a good idea for your family? That depends on a few different factors. If you’re thinking about applying for Parent PLUS Loans, here’s everything you need to know.
What is a Parent PLUS Loan?
The Parent PLUS Loan program is a federal program offered through the U.S. Department of Education. You can apply for a loan through the program if you’re the biological or adoptive parent of a dependent undergraduate student who’s enrolled at an eligible school at least half-time.
Here are the essential details about a Parent PLUS Loan:
- Maximum loan amount: The cost of attendance at your child’s college minus any other financial aid they receive.
- Interest rate: 7.08% (through July 1, 2020).
- Loan fee: 4.236% of the loan amount is deducted from your disbursement.
- Repayment terms: The standard repayment plan is 10 years, but you’ll have options to extend that if you can’t afford the monthly payments. Payments start immediately, but if you request a deferment, you don’t need to start making payments as long as your child is enrolled at least half-time. Once they graduate, leave school, or drop below half-time enrollment, you’ll get a six-month grace period.
- Credit requirements: Your loan terms won’t be contingent on your creditworthiness, but you won’t be able to get approved on your own if you have an adverse credit history. That includes having a bankruptcy discharge, repossession, or foreclosure in the last five years, unpaid collection accounts, and more.
Are Parent PLUS Loans Worth it?
Parent PLUS Loans can be an excellent option to help your child afford college, but they aren’t for everyone.
Before deciding to apply, there are two questions you’ll need to ask yourself: is there a better alternative, and should you be borrowing money to help your child at all?
Is there a better alternative?
The answer to this question is maybe, depending on your child’s tuition cost and your own unique financial situation. Here are a couple of alternatives to consider:
- Undergraduate loans: Before you take out any loans, check to see if your child qualifies for enough financial aid (including federal loans) to cover their costs. Undergraduate federal loans charge lower interest rates than Parent PLUS Loans, and your child may qualify for subsidized loans where the Department of Education pays accruing interest while your child is in school or any other type of deferment.
- Private parent loans: If your credit is in great shape and you have a strong income history, you may be able to qualify for a better interest rate with a private student loan than the standardized Parent PLUS Loan through the federal government. What’s more, private lenders typically don’t charge upfront loan fees, so you’ll save that money right off the bat.
Encourage your child to fill out the Free Application for Federal Student Aid (FAFSA) to determine their financial aid amount and eligibility for both subsidized and unsubsidized undergraduate loans. Even if you’re planning to help them repay their loans, you’ll benefit from the lower interest costs associated with those loans.
Also, take some time to compare private parent loans to determine if you can get a lower interest rate and overall better deal.
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A few things to note if you’re considering private loans:
- You may not qualify for a lower interest rate based on your creditworthiness.
- You may not be able to defer payments while your child is still in school.
- You won’t get access to certain federal benefits, including loan forgiveness programs and the Income-Contingent Repayment Plan.
- Deferment and forbearance options typically aren’t as generous as what the Department of Education provides.
However, if these items aren’t concerns for you, the potentially much lower interest rate can be worth it to save more money in the long run.
Should you be borrowing money to help your child?
The idea of not helping your child at all can make you feel like a bad parent, but in some situations, it may be best for your family in the long run if you avoid borrowing money on their behalf.
Look at your financial situation and future goals to determine if you can afford to take on new debt. Remember that Parent PLUS Loans and private parent loans will show up on your credit report, and that debt can affect your ability to get approved for credit in the future.
Also, as you near retirement age, it’s crucial to ensure that you have enough money set aside to be able to leave the workforce. There are student loans available for your child, but there’s no such thing as retirement loans. If you end up retiring without enough to cover your expenses in the long term, you may be forced to go back to work at some point or live on a shoestring budget.
As you consider these other factors, you may be able to find a balance and provide some assistance while your child makes up the rest. Or the best you may be able to do is to help your child find an inexpensive school, apply for financial aid, scholarships, and grants, and learn how to budget their way through school.
Are Parent PLUS Loans a Good Idea?
Parent PLUS Loans can be a good idea if your child doesn’t qualify for enough federal financial aid to cover the costs of their schooling, and your credit isn’t in good enough shape to qualify for better terms with a private lender.
Even if you do qualify for private parent loans, you may prefer Parent PLUS Loans if you want to take advantage of the benefits the Department of Education provides including deferred payments, loan forgiveness, the Income-Contingent Repayment Plan, and more.
As you consider both the benefits and drawbacks of your loan options, be sure to consider whether you’re financially able to take on the debt at all.
Also, keep in mind that whether you get Parent PLUS Loans or private parent loans, you won’t be able to transfer payment responsibility to your child unless you refinance the loans in their name at a later date.
If this is your long term goal, read up on parent loan refinancing options to make sure you have a plan in place once your child graduates.