Your child is college-bound and you couldn’t be more proud! You brought them into this world, and now you want to help them survive in it as a college-educated adult. You’ve been with them through this whole process – the grueling applications, the fun campus visits, the agonizing deliberation before that final decision. But now, short of disguising yourself as your kid and going to college for them (we definitely don’t recommend this – you’ve done your fair share of homework and tests), how else can you help? Enter Parent PLUS Loans.
Parent PLUS Loans are federal loans that parents of dependent undergraduate students can use to help pay for college. While college can offer your child so much, it also comes with a hefty bill. And while your student can apply to all the scholarships and grants out there, oftentimes it’s not enough. In fact, 42 percent of families borrowed money to pay for college in 2017.
Many colleges send out award letters that cover all financial aid that can help cover tuition gaps. These letters can include Parent PLUS Loans, which present one of the safest options for parent borrowers. Before you decide to apply for a Parent PLUS Loan though, there are a few things you should know.
1. Borrowing federal loans is almost always better than borrowing private loans.
Sure, you always could cosign on a private student loan for your child, but federal loans typically best private loans. Federal loans have fixed interest rates and come with more generous repayment, postponement and forgiveness options than private loan options.
Also, you can consolidate your Parent PLUS Loans under the federal direct loan program to take advantage of income-contingent repayment. Having lower payments could really help out, especially if your repayment carries on later into your golden years.
2. Undergraduate federal student loans tend to be less expensive than Parent PLUS Loans.
It may ease your mind to take on the burden of loans for your child. However, there is one little-known benefit to your child taking out a federal loan instead of you. Only 14% of parents and students know that Parent PLUS Loans have higher rates than undergraduate loans. For the 2018-2019 school year, the interest rates for undergraduate student loans are set at 5.05% while the rates for Parent PLUS Loans are set at 7.60%.
The loan may be in your child’s name, but you can always help out with payments. Ultimately, this rate difference would save both you and your child money in the long run if you choose to take out federal loans in your child’s name instead of yours.
3. You cannot transfer Parent PLUS Loans to your child.
You may decide that you want to transfer your Parent PLUS Loans into your child’s name after they graduate. However, there is no way to transfer responsibility for repaying the loan to your child, even if they’re making the payments. Parent PLUS Loans are always in your name.
Don’t think that cosigning on a student loan is preferable in this regard though! It may keep your child as the primary borrower, but you would still be just as financially responsible. Not to mention, as a cosigner on a private loan, the debt will affect your credit report’s debt-to-income ratio just as much as a Parent PLUS Loan would.
4. Approval for a Parent PLUS Loan doesn’t necessarily mean you can afford it.
A credit check is required to be approved for a Parent PLUS Loan. However, that doesn’t mean that you have the ability to afford it. Only those with severely bad credit scores will be denied. So even families who cannot afford to contribute anything to their child’s education can get approval for this loan.
Many borrowers of Parent PLUS Loans struggle to make their payments while simultaneously putting money aside for retirement. Some even have their own student loan payments to balance alongside the Parent PLUS Loan payments, further complicating the matter. Take the time to fully understand the terms of a Parent PLUS Loan and its impact on your current and future financial health.
If you do find yourself in a student-loan-debt pickle once your student has graduated, you can always give us a call. One of our Student Loan Advisors would be happy to help you and your family find the right student loan solution for you.
Disclaimer: The viewpoints and information expressed are that of the author(s) and do not necessarily reflect the opinions, viewpoints and official policies of any financial institution and/or government agency. All situations are unique and additional information can be obtained by contacting your loan servicer or a student loan professional.