If you’re a parent, you’ve likely already begun to worry about how you’re going to pay for your kid’s college tuition. But what percentage of parents pay for college? It may be less than you expect.
What Percent of Parents Pay for Their Children’s College Education?
85% of parents pay for a portion of their child’s college tuition, according to Sallie Mae’s How America Pays for College 2021. The reality is, even a percentage of the total college bill can be tough for most families to pay.
How much exactly should parents be saving? Average yearly tuition and fees have risen to an average of $38,070 for private four year institutions and $10,740 for in-state residents at public four year colleges.
Add on living costs, and some students can expect to shell over $50,000 for one year of higher education. That means that even parents who only plan to pay for part of the costs of college still must save tens of thousands of dollars to help their kiddos with college.
What Student Loans Are Available to Parents?
Parents considering borrowing a student loan to pay for their child’s education can choose between a federal Parent PLUS Loan, or explore options available at private lenders.
According to the same Sallie Mae survey, parents’ income and savings account for nearly 45% of college costs. Other sources of funding include scholarships, grants, or student loans borrowed by the student. Parents can also borrow a loan to help their students pay for college. Approximately 21% of parents borrowed to help fund their child’s education.
Recommended: The Differences Between Grants, Scholarships, and Loans
Parent PLUS Loans
Parent PLUS Loans, as mentioned, are a type of federal student loan available for parents of dependent undergraduate students.
To apply, parents or their students must first fill out the Free Application for Federal Student Aid (FAFSA®). Then, the parent can apply for the PLUS Loan directly on the federal aid website. There will be a credit check to review any adverse credit history, but approval won’t be dependent on factors like the applicant’s credit score or debt-to-income ratio.
Parent PLUS Loans have a fixed interest rate that is set annually by Congress. Direct PLUS Loans carry an origination fee. For the 2022-2023 school year, the origination fee is 4.228%
Private Parent Loans
Private loans for parents are available from private financial institutions including banks and credit unions. These lenders generally review factors like the applicant’s credit score, income, and those for any cosigner. Private lenders determine their own interest rates, terms, and repayment plans.
Compare annual percentage rates among lenders to help you decide whether a fixed or variable interest rate would be best for your financial situation. Some private lenders charge an origination fee, while others do not.
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Saving for Future College Costs
It can seem insurmountable to even think about saving over $40,000 (per year) for college costs on top of all your other financial responsibilities. One recommendation is to pay off your own student loans before putting significant amounts of money into college savings. Some parents find that refinancing their own student loans if they haven’t yet paid them off may allow them to save money — giving them more financial wiggle room to start saving up for future educational expenses.
How can refinancing help you save on your student loans so you can start saving for your kids’ education? Student loan refinancing allows you to trade in all your student loans for one new loan with a potentially lower interest rate and more favorable repayment terms.
But should you refinance your student loans? Consider if the benefits outweigh any potential negatives. For example, you may be able to secure a more competitive interest rate, but refinancing federal loans will eliminate them from any borrower protections or benefits. So, if you are using one of these benefits — such as pursuing Public Service Loan Forgiveness — refinancing may not make sense. Read more in SoFi’s student loan refinancing guide.
When you refinance your student loans, the lender looks at your current financial situation, including your credit score, income, and future earning potential (among other factors) to calculate an interest rate that could potentially be lower than what you might be paying to the federal government or a private student loan lender. Decreasing the interest rate may allow you to save money over the life of your loan (provided your term remains the same or is shorter).
Refinancing Options
If you are interested in refinancing student loans with bad credit, know that it may be more challenging to secure a competitive interest rate. It’s possible to find a lender and refinanced loans that meet your needs, but you may need to shop around or consider adding a cosigner to your application. A student loan cosigner is someone who agrees to take on responsibility for the loan if you, the primary borrower, is unable to make payments in the future.
If you’re unable to add a cosigner or just want to focus on refinancing without a cosigner, you might want to take some time to focus on building your credit. A few tips on building credit include making monthly payments on-time, keeping your debt-to-income ratio low, and checking your credit report regularly to remove any errors.
On top of potentially saving on interest rates, refinancing your student loans can consolidate multiple student loan payments into one monthly payment.
Furthermore, if you’re able to shorten your loan term through student loan refinancing, you could pay off your student loans even faster, further reducing the amount of interest you’d pay over the course of your loan. Those savings can be converted into savings for your kiddo’s future education — hopefully saving them from having to take out too many student loans themselves.
See what refinancing could do for your student loans by using SoFi’s student loan calculator.
Tips for Saving for College
There are a few options to help parents maximize their savings. In fact, one of the main benefits of saving up for college while your child is still fairly little is that you have time on your side.
If you can sock away even small amounts of money over time, depending on where you put it, you give that money a chance to earn interest or dividends over time — and potentially increase the amount you’ll have to put toward your child’s tuition payments.
Once you’ve decided to start saving up a college fund, you’ll have to choose where exactly you want to save that money. While some parents choose to set aside cash in a regular savings account, the relatively low interest rates on most savings accounts mean that your money may not grow much over time.
Instead, many parents consider a government-sponsored savings program in order to net some serious tax benefits, or even to start investing in order to grow money over time.
When it comes to government savings plans, you can choose from a 529 college savings plan , which offers generous tax benefits, or a Coverdell Education Savings Account, which allows you to invest in stocks and bonds to cover educational expenses.
The Takeaway
While fewer and fewer parents are ready to take on the full cost of their child’s college education, starting to save today can help you save as much as possible for future educational expenses. If you have your own student loans from your college days, one option to create some wiggle room in your budget is to refinance those loans to a lower interest rate.
If you are considering refinancing as one strategy to help you save more for your child’s college fund, take a look at refinancing student loans with SoFi. At SoFi, refinanced loans offer competitive rates to qualifying borrowers with flexible repayment options. Plus, there are no fees and the application takes only a few minutes.
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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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