A Closer Look at Student Loans: What Parents Should Know
Everything Parents Need to Know About Student Loans for College
There’s a lot to think about when your baby is heading off to college.
If you’re like me, you’re probably consumed by overwhelming pride and sadness. My oldest is right at that stage, a junior in high school doing all the college things, like getting college credits through school and taking her ACT. It’s amazing seeing her at this stage, and she makes me such a happy mom. But I’ll forever miss the little girl who always needed me.
Still, as she gets ready for this new, exciting venture, I know she looks to me for college financial advice. More specifically, student loans for college. Your kid needs you, too, because — let’s face it — the money stuff gets confusing, even for adults. Going through the student loan process myself as an adult and now doing it again for my teen, I’ve learned a lot along the way that could help parents like you.
*This is a sponsored post. However, I will always only share information that I believe is relevant to and interesting for my readers.
How Student Loans Work
Student loans for college help the borrower pay for their tuition, fees, and other education-related costs. Student loans don’t just need to cover classes. They can also pay for on or off-campus housing, transportation to and from school, and food while your child is away at college. For many families, student loans are necessary to make college more affordable.
Eventually, your child will need to pay back a student loan, just like you repay your home loan or car loan. However, repayment works a bit differently between the types of loans. Let’s look at those.
Federal Student Loans
Federal student loans come from the government — more specifically, the U.S. Department of Education. Although the government is the lender rather than a bank, these loans work similarly to any private student loan your child might get except that they could be cheaper in the long run. Usually, federal student loans have lower interest rates than private loans and the government may pay the loan’s interest that accrues while your child attends school if they have a subsidized loan. Learn more about the differences between subsidized and unsubsidized federal loans via the government’s federal student aid website.
Your child may not have to begin paying on a federal student loan until after they graduate. The government gives you a six-month grace period before repayment begins, which gives your kiddo time to start earning money with their degree. There are several repayment plans a graduate can enter into, too, that vary based on income to help with affordable payments.
Private Student Loans
Private student loans come from private lenders, such as banks or credit unions. The approval process for private loans can be a little more challenging, so your child might need a cosigner, which could end up being you. Still, they’re good options if your child doesn’t qualify for federal loans or federal loans won’t cover enough of their expenses on their own.
Repayment terms vary with private loans, but most lenders require payments even if your child still attends school.
Parent PLUS Loans
Parents can borrow a Parent PLUS Loan from the government if they’d like to help their child afford college. This loan usually offers a lower interest rate than private loans, but you’ll need a credit check to get approved. You can borrow as much as the full cost of attendance for your child’s education minus other financial aid your child receives. Like other federal student loans, a Parent PLUS Loan is eligible for repayment plans.Parents can borrow a Parent PLUS Loan if they'd like to help their child afford college. Borrow as much as the full cost of attendance for your child's education minus other financial aid your child receives. Click To Tweet
A Parent’s Role in Student Loans
If you helped your college student get a loan, whether federal or private, by consigning or borrowing, you’re at least somewhat responsible for paying that loan. With the Parent PLUS Loan, all responsibility falls on your shoulders. Before the repayment period begins, be sure to research and compare repayment options so that you can find the best way to pay considering your budget.
If you cosigned on a loan, make sure your child knows that the loan is, first and foremost, their responsibility. You helped them get approved with your creditworthiness so that they could afford school, but that doesn’t mean that you should be stuck shouldering the bill. Consider meeting with the school’s financial advisor with your child to discuss student loan options and financing strategies together.
Teaching Your Child to Use Student Loans Wisely
Your kiddo might be almost an adult now, but they still have plenty to learn, especially when it comes to student loans. Here are a few things to teach your college-bound kid about financing their education so that they can reap the benefits without falling into overwhelming debt.
Understand How Much to Borrow
Your child hasn’t yet had experience with borrowing money and paying loans, so it’s a new concept that you might need to explain. First step: let them know that it’s crucial only to borrow as much as absolutely necessary to pay for school. Some loans allow college students to borrow more than they need for tuition to pay for living expenses. However, if you plan to help your student with costs or they plan to work alongside attending school, they might be able to pay those expenses without the help of loans.
Sit down with your child and use a student loan calculator to show them how borrowing can affect how quickly debt can pile up. The Federal Student Aid website’s loan simulator tool can give you an idea of how much your child can expect to pay monthly based on how much they borrow.Sit down with your child and use a student loan calculator to show them how borrowing can affect how quickly debt can pile up. Click To Tweet
Have a System for Paying Them Off
Help your child create a plan for paying off their student loans. One of the best suggestions you can make is for your child to pay as much as they can afford while they’re in school. Even more importantly, pay more than just minimum payments or accrued interest so that they can make a decent dent in their loan’s principal.
Something else that can help if your child has multiple loans is to pay off the high-interest loans before paying the lower-interest ones. This way, they can chip away at their low-interest loans faster without a bunch more interest accruing.
Having a strategy in place can give college-bound students a clear goal to stick with to keep them on the path toward a healthy financial future.
Explore Repayment Options
Although federal loans won’t usually enter repayment until after your child is out of school, understanding repayment options before that time is important. Learning more about them allows your child to strategize about what might work best for their budget and how each option can affect monthly payments.
For instance, a standard repayment plan offers a fixed monthly payment over ten years. This might be best for students who want to pay off their debt as quickly as possible and expect to earn enough to afford higher payments. However, the pay-as-you-earn (PAYE) plan lets students pay no more than 10% of their income every month, allowing them to pay an amount that works for their budget. It may take longer to pay off debt, but it can also give your child time to get acclimated to their career before they pay more for their loans.While student loan forgiveness isn't something your child should rely on to get out of debt, it is a helpful benefit for them to consider if they are unable to pay off their loans within the timeframe they expected. Click To Tweet
There’s also student loan forgiveness to consider for federal student loans. Some borrowers may be eligible to have any outstanding balances on their loans forgiven (i.e., canceled) after 20 or 25 years of payments, while other eligible borrowers can have loans forgiven after ten years of payments. While student loan forgiveness isn’t something your child should rely on to get out of debt, it is a helpful benefit for them to consider if they are unable to pay off their loans within the timeframe they expected.
Consider Consolidating or Refinancing
All the planning in the world can’t prevent unforeseen circumstances that may affect your child’s ability to repay their student loans. Debt consolidation or refinancing can sometimes be a worthy process to consider when repayment feels overwhelming, especially if your college student has multiple loans scattered across different lenders with varying interest rates.
Consolidating student loans puts all balances into one loan, giving your child just one payment to make monthly rather than multiple monthly payments. Refinancing student loans can lower interest rates, combine balances, and may make monthly payments lower. Learn more about managing student loan debt so that you can set your child on the path to a financially healthy future.
Student Loans FAQ for Parents
Is it better to get a student loan or a parent loan?
A parent loan allows you to finance 100% of your child’s tuition minus any other financial aid they receive. This can help fill in the gaps with any tuition your child may still owe and can give them some financial assistance as they begin their college career. On the other hand, if you have bad credit, you may not qualify for a PLUS loan.
Are the parents responsible for FAFSA loans?
No, not unless you borrow money with a PLUS loan. When your child fills out the FAFSA, they’ll need to enter your financial information as part of the qualification process. However, doing so doesn’t mean that you’re responsible for paying their loans.
Do student loans go on the parents’ credit?
If you receive a parent PLUS loan, the loan will remain on your credit until you pay it off. Similarly, a cosigned student loan will also go on your credit. However, any loans 100% in your child’s name will not become part of your credit history.
What happens if my child defaults on their student loan?
Student loans can go into default if your child fails to pay them. Loan servicers can also report their delinquency to any or all of the three major credit bureaus. Parents will only be responsible for delinquent loans if they cosigned a student loan for their child or have failed to pay a parent PLUS loan.
The Parent’s Guide to Student Loans for College
Student loans for college are necessary for many American families, but they don’t have to be scary. When you educate yourself and your child before borrowing and strategize an affordable repayment plan, you’ll both feel better about the process. Drop any questions or comments you have about your child’s student loans in the comments.