If you’re a parent of a child heading off to college, you might be wondering how you’re going to cover their tuition and various expenses — often, even with financial aid, it can be a difficult burden to bear. In fact, only about one in five families are able to foot more than half of the bill for their child’s education, and most expect their children will have to rely on student loans for funding.
Generally, students are advised to apply for any grants and scholarships they’re eligible for before borrowing any money. But if you or your child find it necessary to take out loans, you should be aware that there are many types of student loans, offered both by the government and private lenders.
While government loans are the best place to start, they’re not always the best deal — particularly for graduate students or parents looking to borrow money on their children’s behalf. Here are some things you need to know to make decisions that are the best fit for your individual circumstances.
Direct loans
First, if your family does need to borrow money, always start with federal loans. Direct subsidized loans for example, offer low, fixed-interest rates, which will not start accruing until after your child is finished with school. This can be very helpful at a time when they might find it difficult to hold down a job and make repayments.
But direct subsidized direct loans are only available to students who can demonstrate financial need, and are off limits for grad school students. Direct unsubsidized loans for undergraduates offer the same low rate as subsidized loans, but interest on unsubsidized loans starts growing immediately, so there’s no respite. Rates on unsubsidized loans for grad students are higher than loans for undergraduates.
PLUS loans
If you’d like to take out a loan on behalf of your child — if your child has hit their annual or lifetime limit on subsidized and unsubsidized direct loans, for example — PLUS loans are another option. But be aware that interest rates on PLUS loans are higher. PLUS loans made between July 1, 2016 and June 30, 2017 will carry an interest rate of 6.31 percent.
Private loans
Before taking out any PLUS loans, you might consider comparing offers from private student lenders. Depending on your creditworthiness and the terms of the loan you are seeking, private lenders are often able to beat rates on federal PLUS loans. When you’re doing the math, don’t forget that PLUS loans carry a disbursement fee of 4.3 percent. Many private loans are unencumbered by such fees.
Co-signing a loan
Students with little income or credit history will typically need a co-signer to qualify for a private student loan, since interest rates on private loans are based on the borrower’s creditworthiness. So if you have good credit history, co-signing your child’s loan could help them get the best rate.
Adding a co-signer could result in a greater chance of approval for your child, less risk taken by the lender, and a lower interest rate.
Co-signing is, however, a big responsibility. You are essentially taking on the obligation to repay the loan if your child cannot, sometimes without all the rights enjoyed by the primary borrower. If your child fails to make a payment, not only are you on the hook for the money, that late payment could damage your credit history as well as theirs.
Before co-signing a loan, sit down with your child and consider the following:
- Draw up and sign a written agreement with your child where they agree to make all payments in a timely manner.
- Check whether the lender offers a release to cosigners, and what benefits and protections you are entitled to redeem.
- Don’t just sign and forget. Keep in touch with your child to ensure they are making timely monthly loan payments.