Has your soon-to-be college student chosen the school they’d like to attend in the fall? Or, are they just starting to think about the application process? Either way, it’s never too early to research ways to pay for college.
Student loans, federal and private, are one common method that students and their families use to cover the cost of higher education. Typically, students are the ones who take out these loans (and are responsible for repaying them). However, there are also student loans, both federal and private, available for parents.
Also keep in mind that if your child takes out a private student loan, you will likely need to act as a cosigner, which means you will be responsible for repayment if your child is unable to make payments.
No matter who acts as borrower, it’s important for parents to be in the loop when it comes to student loans. Here’s what you need to know.
Not All Loans Are Created Equally
When it comes to student loans, there are two main options:
• Federal loans (funded by the federal government)
• Private student loans (funded by private lenders)
Federal Student Loans
Federal student loans are provided by the U.S. Department of Education and come in several forms:
• Direct Subsidized Loans These are for undergraduate students and are awarded based on financial need. The government pays the interest on these loans while the student is in school and for six months after they graduate (known as the grace period).
• Direct Unsubsidized Loans These are available to undergraduates, graduate students, and professional students and are not awarded based on need. The borrower is responsible for paying all interest that accrues on the loan.
• Direct PLUS Loans These are for graduate and professional students and parents of dependent undergraduates. They are not based on financial need and a credit check is required.
• Direct Consolidation Loans This option allows you to combine all your federal loans into one loan payment under a single loan servicer.
All federal loans come with fixed interest rates, which means the rate won’t change over the life of the loan. Interest rates are set by Congress each year on July 1st. For most students, federal loan repayment starts after the post-graduation grace period.
To apply for federal student loans, you need to submit the Free Application for Federal Student Aid (FAFSA).
💡 Quick Tip: Make no payments on SoFi private student loans for six months after graduation.
Private Student Loans
Private student loans are available through banks, credit unions, and online lenders. Many private student loans mirror the terms and repayment periods of federal student loans, but not always. Differences between federal versus private loans include:
• Credit checks Most federal student loans don’t require a credit check (except PLUS loans) but it’s required for private student loans. To qualify for a private student loan, you’ll need to meet the lender’s credit and other eligibility requirements.
• Repayment start date Some lenders might allow you to defer making payments until six months after you graduate, while others may require you to begin repayment while you’re still in school.
• Interest rates Federal student loans have fixed interest rates that don’t change over the life of the loan; private student loans offer fixed or variable interest rates.
• Repayment terms Federal loans have long repayment terms — from 10 to 30 years, depending on your plan. Private student loans also vary in term length, but might not be as long.
• Loan forgiveness Some federal student loans offer forgiveness options for certain career paths, or after you’ve made a certain number of payments on an income-driven repayment plan. Private student loans aren’t required to offer this option to borrowers.
How Parents Can Help
If your student has tapped all available financial aid, including federal student loans, you might look into student loans for parents.
The federal government offers Direct PLUS Loans for parents. They have higher interest rates and fees and qualify for fewer repayment plans than federal direct subsidized and unsubsidized loans for students. The interest rate for federal direct PLUS loans is 8.05% for the 2023-24 academic year. There is also an origination fee of 4.228%, which is deducted from each loan disbursement.
To get a PLUS loan, you can’t have an adverse credit history (there may be exceptions to this rule if you meet other eligibility requirements) and you must complete the FAFSA with your child.
It’s important to note that a parent PLUS Loan will ultimately be your responsibility to repay. The only way to transfer parent loans is to have your child refinance the loan with a private lender in their name.
You also have the option of getting a parent student loan through a private lender, such as a bank or credit union.
If you have solid finances and expect to be able to work the entirety of your loan term, a private student loan may be a better deal. Private student loans often offer lower interest rates and typically don’t have origination fees. However, they generally don’t offer as many protections should you lose your income and have trouble repaying the loan.
You Can Use Loan Money Only for Certain Things
Typically, student loans are paid out directly to the school. The school will then apply your loan money to tuition, fees, and room and board (if your student lives on campus), and give any remainder to your student. They can then use the surplus funds but only for education-related expenses. This includes textbooks, computers/software, transportation to and from school, housing, meal plans or groceries, and housing supplies (e.g., sheets, towels, etc.).
Students can’t, however, use the proceeds of a student loan to pay for entertainment, going out to dinner, takeout meals, clothing, or vacations.
Federal Loans Offer More Forgiveness Options
Some student loan repayment plans, like income-driven plans, give graduates the opportunity to have their loans forgiven if they aren’t fully repaid at the end of the repayment period, which may be 20 or 25 years.
Depending on the field of work your student may enter, there may be other forgiveness options. For example, under Public Service Loan Forgiveness (PSLF), borrowers can have their loans forgiven after 120 monthly loan payments. To qualify, you must work for an eligible non-profit organization or government agency full-time while making those qualifying payments.
With the Teacher Loan Forgiveness Program, borrowers can qualify for up to $17,500 in loan forgiveness if they teach full-time for five full and consecutive academic years in a low-income elementary or secondary school or educational agency.
There are far fewer student loan forgiveness programs available for private student loans than federal loans. However, some private lenders offer loan modification or repayment assistance programs.
💡 Quick Tip: Would-be borrowers will want to understand the different types of student loans that are available: private student loans, federal Direct Subsidized and Unsubsidized loans, Direct PLUS loans, and more.
The Takeaway
You and your student will generally only want to look into student loans after you’ve tapped more cost-effective forms of funding, such as scholarships, fellowships, and grants — since that’s money you don’t have to pay back.
After that, you might consider federal student loans. You don’t need a credit history to qualify, and they come with low interest rates and programs, like income-driven repayment plans and loan forgiveness, that private loans don’t offer. If you still have gaps in funding, you might next look at private student loans.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
About the author
Julia Califano
Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.
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