May 21, 2018

Should Your Child Take on Loans?

What should you know about student loans?

Many parents dream of their child receiving a full scholarship, or hope that their savings will be enough to cover tuition costs. However, the reality is that even the most gifted students have to tap the well of student loans. Although a scary thought, student loans do not have to be a bad thing as long as both the parent and the student are well educated about their options.

Here is a quick guide of some of the most popular types of student loans which are available to help your child pay for their college education.

Direct Subsidized Loan: The Direct Subsidized Loan is probably the most popular type of loan that your kids will first take out. The Federal Government backs these loans and they are about as solid a deal as your child is going to get. Available to undergraduate students who have a financial need, the value of your loan is going to be determined by your school. The US Department of Education will pay the interest on the Direct Subsidized loan so long as the student is in school at least half time, during a period of defined deferment, and for the first six months after the student has left school.

Please note that a deferment is not the same thing as your child just deciding they are not going to pay the loans. Your child must apply for and be granted deferment. The deferment period is not forever and your child’s situation must fall within certain parameters.

Direct Unsubsidized Loan: Direct Unsubsidized Loans are available to any student going to college regardless of financial need. Your child’s school will determine the amounts of these loans.

Unsubsidized loans will have interest begin to accrue on them immediately. This means if you have these loans your child is paying interest on them from day one. Students can choose to pay the interest, or let it build up. Sometimes parents will choose to pay the interest for their child.

While it is not ideal to have to pay loan interest while in college, it can also be a good thing as it keeps students more aware of their financial situation and gets them used to the idea of a monthly loan payment. A part-time job during school usually can provide enough income to make payments on interest.

If a student chooses not to pay the interest it will accumulate and be capitalized. That means that even while they are in school, during grace periods, deferment, and even forbearance, the interest continues to add up!

PLUS Loan: Another type of loan, which can help bridge the gaps not covered by other loans, are PLUS loans. These are for the parents of dependent undergraduate as well as graduate students. 

PLUS loans are offered by the US Department of Education and the borrower cannot have any type of adverse credit history. Most undergraduate students don’t have much credit history at all; this is why parents of undergraduate students are the ones to take on these loans.

The amount of the aid is determined by the cost of attendance minus any other financial aid your child is receiving. So it is a good idea to be certain that you are completely transparent if you do decide to apply for PLUS loans.

Perkins Loan: If your student or your family is having exceptional financial need another type of loan which may be available is the Federal Perkins Loan. Every school does not offer these types of loans; check with your child’s financial aid office. But these are really smart, low-interest loans made to those with exceptional financial need.

Perkins Loans are available to graduate, undergraduate, and professional students. The interest rate is set at a very reasonable 5% and your school is the lender. Funds for these type of loan is going to vary greatly depending on if your child’s school even offers the loan and how many others have gotten them first. Make sure to check back early if your child’s financial need does appear to be dire.

Private Loans: Private loans are always an option for both students and their parents to help pay for school. Depending on the lender, you may be able to find better terms by taking out the loan yourself. Students can take on private loans, but the lender may require the student to have a work history, have good credit, and a relationship with a specific bank. More likely though your kids will need you to co-sign for a private loan.

Lenders like Sallie Mae, Discover, PNC Bank, Citi, and Capital One just to name a few are some places that your kids can inquire about private loans. For the best results, you should compare offers from multiple lenders. We recommend Credible for this service.

If you aren’t able to sign on with your kids or if they are older with bad credit, there are some spaces that they can turn to. Lending Tree, Go To College, and Simple Tuition are three of the names you and your kids can investigate for credit situations that are less than enviable.

Check the details before signing onto any private loans. The advantage of federal loans is that there are typically a lot of flexible options for students to pay them back. Private loans may have good options too, just make sure you know what you’re getting in to!

Cosigning a Loan

Some federal loans, and most private loans, will need a parent to act as the endorser or cosigner. Having someone with a good credit history cosign means the student can take advantage of the best deals and rates on their loans. However, you could also be on the hook for payments if something happens to the student. Read more about this issue.

How Much is Too Much?

Everyone has heard a story or two about a college graduate with a degree in French Literature and $80,000 in debt who can’t find a job. These types of stories can often make parents very wary of their child taking on any debt.

The reality is as many as 76% of students take on debt to pay for college. While the average amount of debt students graduate with is $30,000, many graduate with much less than that. Student debt is sometimes called “good debt” as it is often not negatively considered by creditors as long as the student makes payments on time.

Students and their parents need to be realistic about their wants and needs when it comes to education. If your student gets a great financial aid package that allows them to go to a good school and only take on $10,000 worth of loans this is a no-brainer. They should go! But if their dream school is going to weigh them down with $50,000 of debt or more it may not be worth it, even if it’s the dreamiest of dream schools. 

Speak frankly with your child about what type of education they can afford and how much you can help them with costs. Make sure they understand how much interest can grow and what their minimum payment will be upon graduating. Have them do research into their anticipated career to see how much their starting salary is likely to be. All of this research can inform them on how much debt they can afford to take on.

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