Higher education might lead to higher earnings, but the increasing price tag can make it feel out of reach. For parents, the pressure to take out loans for their children’s education is high, with an estimated 42% of parents taking out student loans for their children in the 2017–2018 school year, according to Sallie Mae’s latest “How America Pays for College ” study.
What’s more, one in three parents say they’ll help their child pay back “all or some” of their student loans. Whether the loan is in your name or your child’s, many parents feel the pressure to help pay for education in some way.
While just over half of parents say they’ll take out loans in their name to cover their children’s education, the percentage of students who take out loans in their own name is nearly double. As of 2017, about 70% of students leave college with loan debt . The reality is, more students are paying for their education than their parents are.
The desire to help your kid pay for college so they can focus on their studies is a strong one, but it’s important to consider your options when it comes to borrowing money. Read on for a high-level overview of which types of student loans you could apply for, as well as some advantages and disadvantages of taking out those loans in your name.
Federal Student Loans
In terms of federal student loans, parents can take out a Direct PLUS loan in their name to pay for their children’s education. These loans, also called Parent PLUS loans, can help pay for expenses not covered by other financial aid.
The benefits of a Parent PLUS loan can include:
• A fixed interest rate (for loans first disbursed on or after July 1, 2019, and before July 1, 2020, the interest rate is 7.08% )
• Deferment under certain conditions
• Flexible repayment options
• Possible eligibility for Public Service Loan Forgiveness
If you want to transfer the loan to your child’s name down the line, you may be able to do so if you refinance your PLUS loan with a private lender. Parent PLUS loans cannot be consolidated with loans held in the student’s name through a Direct Consolidation loan. They also cannot be transferred into the name of the student.
On the other hand, if your child is taking out federal student loans , they may be eligible for:
• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Direct PLUS Loans (for graduate school)
Depending on demonstrated financial need, your child might have more options for federal aid if they apply on their own. However, if all other federal aid is exhausted, the Parent PLUS loan might be a great supplement to your child’s tuition payments after federal aid, scholarships, or grants.
Private Student Loans
When federal student loan options are exhausted, some students and parents may turn to private loans to help fund their education. Parents can take out a private loan in their own name to pay for college for their student. If you have a strong credit history, you might consider a private loan over the PLUS loan—there’s a chance you could qualify for a lower interest rate.
With a private student loan, you may have the option of a fixed- or variable-rate loan, potentially giving you more flexibility on repayment. With a private student loan, you might have the chance to choose the term length of a loan as well.
Your child can also apply for private loans, but in most cases, they’ll require a cosigner. A 2012 study found that 90% of private student loans had a cosigner. With a cosigner, or when applying for student loans in your name, there’s a chance you’ll score a lower interest rate than your child would alone, depending on your income and credit history. But as a cosigner, you are (of course) held responsible if payments aren’t made by your child.
Pros and Cons of Taking the Loan Out in Your Name
Taking out a student loan for your child in your name—federal or private—could mean less of a financial burden on your child as they enter college. Since the loans are in your name, it’s not up to your child to pay them, even after a degree is earned.
Having a loan under your student’s name, however, could help build their credit history. But if you have a strong credit history (among other relevant financial factors), you’ll likely be able to secure private loans at a lower rate than they could, considering their limited or nonexistent credit.
However, if you are unable to make timely payments, your credit could take a hit . It could also take a hit if you are a cosigner on a loan that’s under your child’s name and they can’t make payments. It might help to talk through all these options with your child, making sure they understand what it means to cosign a loan for them. Similarly, if you decide to take out loans for them in your name, they should understand the responsibility you’re assuming.
There’s nothing wrong with wanting to borrow for your child’s future, just consider all your options and think about what you, or they, can afford to pay back. It’s almost always a good idea to maximize federal aid and scholarships before resorting to loans of any kind.
Some private lenders offer the option to refinance Parent PLUS loans. Depending on the lender, you might have the option to transfer the loan to your child’s name. If your child is confident in their ability to pay off the loan with on-time, monthly payments, having a student loan in their name could help build their credit history.
This would, of course, have to be something you and your child agree is the right path for all parties, especially since refinancing a federal loan may cause you to lose some of the benefits offered, like income-contingent repayment plans .
Ultimately, the choice as to how your child pays for college is personal. Whatever options you choose in terms of paying for school, take the time to appreciate all the hard work your student has put into their education and the pride you all will feel as they don their cap and gown.
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